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5.5CapitalizedCost
Capitalizedcostreferstothepresentworthofcashflowswhichgoonforaninfiniteperiodoftime.Some
publicworksprojectslikedams,bridgesandparksfallintothiscategory.Inaddition,somepermanent
endowmentcalculationsrequirecapitalizedcostconsiderations.Thecashflowsinvolvedinthecalculations
canbecategorizedasoneoftwotypes:recurring(i.e.periodic/repeating)andnonrecurring(i.e.finitetime
interval).Therepaintingofabridgeeverythreeyearsisanexampleofarecurringcost.Theinitial
investmentcostorapartialannualserieswhichoccursonlyinyears1thru10areexamplesofnonrecurring
cashflows.Thebasicequationinvolvedincapitalizedcostcalculationsis:
P=A/i
Thevalidityofthisequationcanbeeasilydemonstratedthruanexample.Supposeonewantedtoknowhow
muchmoneycouldbewithdrawnforeverfromanaccountwhichcontains$1000earninginterestatarateof
10%peryear.Obviously,itistheinterest($100peryearinthiscase)thatcanbewithdrawnforever.In
equationform,
Interest=Principal*Interestrate
A=Pi,or
P=A/i
Theproceduretofindthecapitalizedofcashflowswhichcontainaninfiniteseriesis
FindthePWofallfiniteintervalcashflowsusingtheregularengineeringeconomyformulas(P/F,P/A,
1.
P/G,etc)
Convertall(nonannual)recurringamountsintoannualworthsoveronelifecycleandaddallAvalues
2.
together
DividetheAvaluesobtainedinstep(2)byitogetthePWoftheannualamounts.
3.
AddallPWstogethertogetthecapitalizedcost.
4.
Thenextexampleillustratesthecalculationsinvolved.
Example5.6Adamwillhaveafirstcostof$5,000,000,anannualmaintenancecostof$25,000and
minorreconstructioncostsof$100,000everyfiveyears.Ataninterestrateof8%peryear,thecapitalized
costofthedamisnearestto:
(A)$213,125(B)$525,625(C)$5,312,500(D)$5,525,625
Solution:
The$5,000,000firstcostisalreadyapresentworth.The$100,000whichoccurseveryfiveyearscanbe
convertedintoaninfiniteAvalueusingtheA/Ffactorforonelifecycle.DividingtheAvaluesbyiand
addingtothe$5,000,000PWwillyieldthecapitalizedcost,CC.
CC=5,000,00025,000/0.08100,000(A/F,8%,5)/0.08
=5,000,000312,500100,000(0.1705)/0.08
=$5,525,625
Answeris(D)
Occasionally,itmaybenecessarytodeterminethecapitalizedcostofanalternativewhichhasafinitelife
suchaswhenitiscomparedagainstonewhichhasaninfinitelife.Insuchacase,thecapitalizedcostofthe
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finitelifealternativecanbefoundbyfirstconvertingallofitscashflowsintoanequivalentannualworth
(A)overonelifecycleandthendividingbyi.Thenextexampleillustratesthecalculationsinvolved.
Example5.7Thefirstcostofacertainpieceofequipmentis$50,000.Itwillhaveanannualoperating
costof$20,000and$5,000salvagevalueafterits5yearlife.Ataninterestrateof10%peryear,the
capitalizedcostoftheequipmentisclosestto:
(A)$32,371(B)$122,712(C)$323,710(D)$522,710
Solution:ConvertallvaluesintoanequivalentAvaluethruonelifecycleanddividebyi:
A=50,000(A/P,10%,5)20,000+5,000(A/F,10%,5)
=50,000(0.26380)20,000+5,000(0.16380)
=$32,371
CC=32,371/0.10
=$323,710
Answeris(C)
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