Question

The original cost of a certain asset is $1,085. It has to be replaced (at this cost) every 13 years; the salvage value is negligible. Annual revenues and expenses are expected to be $482 and $347, respectively, over an indefinite period of time. The interest rate is 1.8%. What is the capitalized worth?

Answer 1

We have the following information

Initial cost = $1085

Replacement cost every 13 years = $1085

Annual revenue = $482

Annual expenses = $347

Interest rate (i) = 1.8% or 0.018

Life (n) = Infinite

Capitalized Worth = – Initial cost – Replacement cost every 13 years(A/F, 1.8%, 13)(P/A, 1.8%, n=infinite) + Annual revenue(P/A, 1.8%, n=infinite) – Annual expenses(P/A, 1.8%, n=infinite)

Capitalized Worth = – 1085 – {1085 × [0.05/((1 + 0.05)¹³ – 1)] × (1/0.018)} + {482 × (1/0.018)} – {347 × (1/0.018)}

Capitalized Worth = – 1085 – 4156.67 + 26777.78 – 19277.78

Capitalized Worth = $2,258.33