capitalized cost sample problems PDF

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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: Cc =C o +

Ao RM RC + + k i (1+ i ) −1 ( 1+i )L−1

First Operating System:

To

infinity

−10

Cc=150,000 + 50,000 (1.05 )

Cc1 =P ¿ (Compute the Value)

+5,000 [

4 ( 1.05 ) −1 15,000 8,000 −4 ]+ ( 1.05 ) + 4 13 0.05 ( 0.05 ) (1.05 ) ( 1.05 ) −1

Second Operating System:

Cc=150,000+

to infinity

4,000 10,000 20,000 + + Cc =P 294,350 0.05 ( 1.05 )5−1 ( 1.05 ) 11−1 2

Since Cc 1 >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

Solution: Cc=C o+ Cc=5,000,000+ Cc=P5,525,570

Ao i

+

RC RM + k (1+i ) −1 ( 1+i )L −1

25,000 100,000 + 0.08 ( 1.08)5 −1

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: Cc=300,000+

75,000 35,000 + 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) CC A =1 M +

5)

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

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+ 5 0.10 (1 +0.10 ) −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

( ) (

1+

r m -1 m

1+

i 1 0.08 4 −1= 1+ -1 1 4

)

( )

Nr = 8.24% cpd. a.

CC A =Co +

Cl

A o R∧M + ¿¿ i

CC A =5,000,000+

b) Option B Same interest,

50,000 700,000 + ¿¿ 0.0824

Cl

CC B =Co +

A o R∧M + ¿¿ i

CC B =4,000,000+

50,000 750,000 + ¿¿ 0.0824

CC B =¿P 8,268,768.956 

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