14 PROCESS ENGINEERING ECONOMICS

These annual of $75.90 put out at interest of 6 per cent

deposits
will be worth exactly $1,000 at the end of 10 years. It will be noted that
Eq. (2-9) is a special form of Eq. (2-2) with the annual interest on the
principal P omitted. If this annual interest 0.06 X 1,000 = $60 is added
to the annual payment of $75.90, a total of $135.90 results, the same as
for Eq. (2-10), which can also be shown readily by algebraic solution.
Since the sinking fund returns the original investment without interest
through a periodic payment, it is used in capitalized cost calculations
where a perpetual service is desired. In the case of the automatic
recorders mentioned above costing $1,000 and renewed every 10 years,
the annual capitalization costs for perpetual service are based only on
replacing the meter ($1,000 without interest) every 10 years, or $75.90
per year. The capitalized cost at 6 per cent is $75.90/0.06 = $1,265 for
the annual charges. The total capitalized cost for the service is the
sum of $1,265 plus the initial cost of $1,000, or a total of $2,265. This
sum will be recognized as equal to the capitalized value of $135.90 at
6 per cent, where the $135.90 is the annual cost of capital recovery of an
initial $1,000 to be recovered in 10 years. This equality results from
dividing both sides of Eq. (2-10) by i'.
The use of Eq. (2-11) for mineral resources will be illustrated by a
special problem. Petroleum engineers have been retained to study an
oil property, the rights to which have been offered for sale at $1 million.
The engineers estimate that oil can be obtained for 10 years and an
average of $250,000 can be realized each year after deducting all costs
attendant to producing the oil. With a sinking fund at 3 per cent to be
used for capital recovery of the original investment, they can also esti
mate the rate of return (interest) that will be earned on the investment
by means of Eq. (2-11) and trial and error solution:

1,000,000 = 250,000
CI 03") 10 - 1

,[(10^)10i1] + 0 03
1,000,000 = 1,000,000 at i = 0.163, or a 16.3 per cent rate of return

which is called the stipulated rate. If the individuals who have retained
the engineers consider 16.3 per cent a good return on their money, the
oil rights would be a good investment. It should be noted that the
actual rate of return by this formula is greater than 16.3 per cent, since
$250,000 per year as capital recovery on $1,000,000 for a. period of 10
is,

years by Eq. (2-2) and Fig. 2-2,

fy
D
F = _1,000,000 =
;

250,000

Entering Fig. 2-2 at = and n = 10, the value for estimated at

P

is
4