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Sample Problems For Capitalized Cost

The document provides examples of calculating the capitalized cost (Cc) of various assets and projects. Cc takes into account the initial cost, annual operating costs, periodic repair/maintenance costs, salvage value, and interest rate. The examples show calculating Cc for operating systems, dams, machines, equipment, and power plant options to determine the total lifetime cost and identify the most cost-effective option.

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Bruce Banner
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19K views6 pages

Sample Problems For Capitalized Cost

The document provides examples of calculating the capitalized cost (Cc) of various assets and projects. Cc takes into account the initial cost, annual operating costs, periodic repair/maintenance costs, salvage value, and interest rate. The examples show calculating Cc for operating systems, dams, machines, equipment, and power plant options to determine the total lifetime cost and identify the most cost-effective option.

Uploaded by

Bruce Banner
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Sample Problems for Capitalized Cost

1. The Lopez Group has two proposed operating systems to charge and track toll fees. The first
operating system has a cost of P150,000 and an additional cost of P50,000 after 10 years. The
annual software maintenance contract cost is P5,000 for the first 4 years and P8,000
thereafter. In addition, there is expected to be recurring major upgrade cost of P15,000 every
13 years. The second operating system costs P100,000, annual software maintenance that
costs P4,000, additional repair of P10,000 every 5 years and a recurring major upgrade cost
of P20,000 every 11 years. Assume i=5 % per year.

Solution:
Ao RM RC
Cc=C o+ + +
i ( 1+ i ) −1 ( 1+i )L −1
k

First Operating System: To

infinity

( 1.05 ) 4−1 8,000 15,000


Cc=150,000+50,000 (1.05 )−10 +5,000 [ 4
]+ ( 1.05 )−4 + 13
( 0.05 ) ( 1.05 ) 0.05 ( 1.05 ) −1
Cc1 =P ¿ (Compute the Value)
Second Operating System: to infinity

4,000 10,000 20,000


Cc=150,000+ + + Cc =P 294,350
0.05 ( 1.05 ) −1 ( 1.05 )11−1 2
5

Since Cc1 >Cc 2, choose the second operating system.

2. A dam will have a first cost of P5,000,000 and an annual maintenance cost of P25,000 and
minor reconstruction costs of P100,000 every five years. What is the capitalized cost if the
interest is 8%?

To infinity

Ao RM RC
Solution: Cc=C o+ + +
i ( 1+ i ) −1 ( 1+i )L −1
k

25,000 100,000
Cc=5,000,000+ +
0.08 ( 1.08 )5−1
Cc=P5,525,570
The Capitalized Cost of the dam is P5,525,570

3. Find the Capitalized Cost of a machine that costs P300,000, annual costs of P35,000, and
periodic costs every 5 years of P75,000. Use an interest rate of 12%.
To
infinity

Solution:
35,000 75,000
Cc=300,000+ +
0.12 ( 1+ 0.12 )5−1
Cc=P690,048

The capitalized cost is the machine is P690,048

4) An asset was purchased for P1M and retired at the end of 20 years with a salvage value of
P40,000. The annual operating cost was P180,000. Find the capitalized cost of the asset
based on an interest rate of 12%. (Draw the Cash Flow Diagram)

180,000 1 M −40,000
CC A =1 M + +
0.12 ( 1+0.12 )20−1
CC A =₱ ¿ (Compute the Value)

5) A dam will have a first cost of $5,000,000, an annual maintenance cost of $25,000 and
minor reconstruction costs of $100,000 every five years.  What is the capitalized cost of the
dam at an interest rate of 8% per year?
25,000 100,000
CC A =5,000,000+ +
0.08 ( 1+0.08 )5−1

CC A =$ 5,525,570.568
6) The first cost of a certain piece of equipment is $50,000.   It will have an annual operating
cost of $20,000 and $5,000 salvage value after its 5-year life.  What is the capitalized cost
of the equipment at an interest rate of 10% per year?
20,000 50,000−5,000
CC A =50,000+ +
0.10 ( 1+0.10 )5 −1

CC A =₱ ¿ (Compute the Value)


7) A businessman wants to build a powerplant and he came up with two options. Option A
has a First Cost of P5M and a salvage value of P 500,000 at the end of 20 years. Its
operating cost is P 50,000 every year and thereafter. The repair and maintenance cost is
P700,000 every 5 years and thereafter while the partial replacement cost is P900,000 every
10 years. Option B has a First Cost of P4M and has the same salvage value and operating
cost as that of Option A. The repair and maintenance cost is P750,000 every 4 years and
thereafter while the partial replacement cost is P900,000 every 10 years. If both options
have an interest rate of 8% compounded quarterly, which option is better?

Solution:

a) Option A
Convert % cpd. qtr to % cpd. a

r m
( )
1+
m
-1

4 1

(1+ 0.084 ) −1=(1+ 1i ) -1


Nr = 8.24% cpd. a. Cl

A o R∧M
CC A =C o + + ¿¿
i
50,000 700,000
CC A =5,000,000+ +
0.0824 ¿¿

b) Option B Cl
Same interest,
A o R∧M
CC B=C o + + ¿¿
i
50,000 750,000
CC B=4,000,000+ +
0.0824 ¿¿
CC B=¿ P 8,268,768.956

 Since CC A > CC B , choose option B .

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