Question

Find the capitalized cost for the following information:

Note: Write a positive number, with at least one digit after the decimal point.

First cost, $

210,000

Cost at the end of year 4

190,000

Annual cost, $

38,000

Periodic costs, every 5 years, $

87,000

Salvage value, $

20,000

Interest rate, %

10

Answer 1

For finding Capitalised cost we find the present worth of constant periodic cost over an infinite analysis period.

  

Note- the reason for discounting $87,000 cashflow with a rate of 61% is that the effective interest rate for a period of 5 years is (1.1⁵ - 1 ) * 100. ]

Note- to find just do 38,000 / 0.1 and of find just do 87,000 / 0.61. We need to add the present value of salvage value to P to get the capitalized cost

P = -( 210,000 + 129,772 + 380,000 + 142,623 ) = -862,395

{ But, In this question time when 20,000 is salvage value is not clearly mentioned which we would require to discount this salvage value to t=0. }

Assuming it to be t = x year will give us capitalized cost = - 862,395 + 20,000 / ( 1.1^x )

if x was 5 then cc = -849,976