Question

An item costs $12000. The business will need to replace this item every 9 years at the same cost. If money is worth 7.75% compounded annually, state the capitalized cost of the item. Use standard rules of rounding.

Answer 1

The $12,000 cost of the item is treated as recurring cost. The first step is to convert the recurring cost to an A value over the first cycle of 9 years.

A = - $ 12,000 ( A/F, 7.75%, 9 years )

( A/F, 7.75%, 9 years ) = Sinking fund factor

The sinking fund factor is found using the following equation

(A/F, 7.75%, 9 years) = 0.080919476

A = - $ 12,000 0.080919476  

A = - $ 971.0337173

Capitalized cost = $ 12,529.47 $ 12529.5

If rounded to the whole number

Capitalized cost = $ 12530