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    Capitalized Cost

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    advikapriya
    The document discusses capitalized cost calculations for projects that last indefinitely. It provides examples of recurring and nonrecurring cash flows. It then gives step-by-step instructions for calculating the capitalized cost using a case study of setting up an endowment fund that provides $100,000 in scholarships annually in perpetuity. Another example calculates the equivalent present value of initial and recurring maintenance costs for new software purchased by a county.

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    Capitalized Cost

    Uploaded by

    advikapriya
    26 views10 pages
    The document discusses capitalized cost calculations for projects that last indefinitely. It provides examples of recurring and nonrecurring cash flows. It then gives step-by-step instructions for calculating the capitalized cost using a case study of setting up an endowment fund that provides $100,000 in scholarships annually in perpetuity. Another example calculates the equivalent present value of initial and recurring maintenance costs for new software purchased by a county.

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    The document discusses capitalized cost calculations for projects that last indefinitely. It provides examples of recurring and nonrecurring cash flows. It then gives step-by-step instructions for calculating the capitalized cost using a case study of setting up an endowment fund that provides $100,000 in scholarships annually in perpetuity. Another example calculates the equivalent present value of initial and recurring maintenance costs for new software purchased by a county.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    26 views10 pages

    Capitalized Cost

    Uploaded by

    advikapriya
    The document discusses capitalized cost calculations for projects that last indefinitely. It provides examples of recurring and nonrecurring cash flows. It then gives step-by-step instructions for calculating the capitalized cost using a case study of setting up an endowment fund that provides $100,000 in scholarships annually in perpetuity. Another example calculates the equivalent present value of initial and recurring maintenance costs for new software purchased by a county.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    Capitalized Cost

    CAPITALIZED COST CALCULATION AND


    ANALYSIS
    • Capitalized cost (CC) is the present worth of an
    alternative that will last "forever.“

    • Public sector projects such as bridges, dams,


    irrigation systems, and railroads fall into this
    category.
    Mathematically, the amount A of new money
    generated each consecutive interest period for an
    infinite number of periods is,

    A= Pi = CC(i)
    • The cash flows (costs or receipts) in a capitalized
    cost calculation are usually of two types: recurring,
    also called periodic, and nonrecurring.

    • An annual operating cost of $50,000 and a rework


    cost estimated at $40,000 every 12 years are
    examples of recurring cash flows.

    • Examples of nonrecurring cash flows are the initial


    investment amount in year 0 and one-time cash
    flow estimates at future times, for example,
    $500,000 in technology calibration and
    upgradation.
    Example 1:

    • An alumna of Ohio State University wanted to set up an

    endowment fund that would award scholarships to engineering

    students totaling $100,000 per year forever. The first scholarships

    are to be granted now and continue each year forever. How much

    must the alumna donate now, if the endowment fund is expected

    to earn interest at a rate of 8% per year?


    Procedure
    1. Draw a cash flow diagram showing all nonrecurring (one-time) cash flows and

    at least two cycles of all recurring (periodic) cash flows.

    2. Find the present worth of all nonrecurring amounts. This value is CC1 .

    3. Find the equivalent uniform annual worth (A) through one life cycle of all

    recurring amounts. This value will be same in all the succeeding life cycles.

    4. Add this value to all other uniform annual amounts occurring in years 1 through

    infinity and the result is the total equivalent uniform annual worth (AW).

    5. Divide AW obtained in step 4 by the interest rate ‘i’ to obtain CC2 value.

    6. Add CC1 & CC2 values obtained in steps 2 and 4 to get the capitalized cost of the

    entire project.
    Example 2:
    The property appraisal district for Marin County has just installed new
    software to track residential market values for property tax computations.
    The manager wants to know the total equivalent cost of all future costs
    incurred when the three county judges agreed to purchase the software.
    If the new system is used for indefinite future, find the equivalent value
    (a) now and (b) for each year hereafter.
    The system has an installed cost of $150,000 and an additional cost of
    $50,000 after 10 years. The annual software maintenance contract cost is
    $5000 for the first 4 years and $8000 thereafter. In addition, there is
    expected to be a recurring major upgradation cost of $15,000 every 13
    years. Assume that i = 5% per year for county funds.
    a.
    Practice Problem

    1. A city that is attempting to attract a professional football team is planning to


    build a new stadium costing $250 million. Annual upkeep is expected to
    amount to $800,000 per year. The artificial turf will have to be replaced every
    10 years at a cost of $950,000. Painting every 5 years will cost $75,000. If the
    city expects to maintain the facility indefinitely, what will be its capitalized
    cost at an interest rate of 8% per year?

    CC = $-251,979,538

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