Exercise No.

7
Capitalized Cost

1. To maintain a bridge, P25,000 will be required at the end of 3 years and annually thereafter. If
money is worth 8%, determine the capitalized cost of all future maintenance.

2. A manufacturing plant installed a new boiler at a total cost of P750,000 and is estimated to
have a useful life of 10 years. It is estimated to have a scrap value at the end of its useful life of
P25,000. If interest is 12% compounded annually, determine its capitalized cost.

Capitalized Cost (CC) = First Cost (FC) + Cost of Perpetual Maintenance

S
Capitalized Cost = FC + X = FC +
¿¿

Where:
X = the amount of principal invested at i% per period, the interest on which will
amount to S every k periods
S = the amount needed to replace or maintain the property every k periods
Xi = interest on the amount X for each period

If the property or structure costs P S to obtain and it will have to be replaced every k periods
for the same amount, then
S
Capitalized Cost = S + X = −k
1−( 1+i ) ¿ ¿
Cost of replacement = FC or original cost - Scrap Value or Salvage Value (Depend
sometimes on what is given in the problem)
3. The capitalized cost of a piece of equipment was found to be P710,000. The rate of interest
used in the computations was 12%, with a salvage value of P50,000 at the end of a service life
of 8 years. Assuming that the cost of perpetual replacement remains constant, determine the
original cost of the equipment.

4. Compare the capitalized costs of the following road pavements:

(a) An asphalt pavement costing P500,000 which would last for 5 years with negligible repairs.
At the end of 5 years, P25,000 would be spent to remove the old surface before P500,000 is
spent again for a new surface.
 (b) A thick concrete pavement costing P1,250,000 which would last indefinitely, with a cost of
P100,000 for minor repairs at the end of every 3 years. Money is worth 8% compounded
annually.

5. A research foundation wishes to set up a trust fund earning 10% compounded annually to
(1) Provide P10,000,000 for the lot and building and P5,000,000 for the initial equipment of a
Structural Engineering and Materials Laboratory;
(2) Pay P2,000,000 for the annual operating costs every year, and
(3) Pay P2,500,000 for the purchase of new equipment and replacement of some equipment
every 5 years beginning 5 years from now.
How much money should be paid into the fund for the building and equipment and to pay
for perpetual operation and equipment replacement?

6. A heat exchanger is needed in a chemical process. If interest is 10% compounded annually,

determine which of the following heat exchangers is cheaper by comparing the capitalized
costs:
(a) Exchanger A costs P110,000 with a scrap value of P5,000 and a useful life of 6 years;
(b) Exchanger B costs P140,000 with a scrap value of P7,500 and a useful life of 10 years.

7. A certain type of untreated pole to be used for an electrical distribution system costs P3,120 in
place, and it is expected to last 10 years before replacement. If this pole is treated with a wood
preservative it is expected to last 20 years before replacement, but will cost P3,600 in place.
Assuming the cost of renewal to be the same as the cost for each type of pole, compare the
capitalized costs of the poles using an interest rate of 14% compounded annually.

8. Corrosive liquids are transported through pipes in a factory. Ordinary pipes will have an
installed cost of P180,000 and their useful life is 4 years. Stainless steel pipes are highly
resistant to the corrosive effect of the liquids and are being considered as an alternative. These
pipes are estimated to have an installed cost of P330,000. Scrap value is zero in each case. If
money is worth 10% compounded annually and assuming replacement costs to be the same as
the original prices, what should be the useful life of the stainless steel pipes to have equal
capitalized cost as the ordinary pipes?
9. Compare the capitalized costs of the following penstocks for a hydro-electric plant with interest
at 10% compounded annually:

Timber Steel
First Cost P300,000 P480,000
Estimated life 12 years 30 years
Scrap Value P12,000 None
Annual Maintenance P7,200 P1,200

10. A financial analysis of two types of bridges based on capitalized cost and on the following data
is to be made:
Bridge A Bridge B
Initial Cost P2,000,000 P2,400,000
Cost of renewal P2,000,000 P2,400,000
Salvage value 0 P200,000
Annual maintenance P10,000 None
Repairs every 5 years P100,000 P50,000
Life 30 years 40 years
If the rate of interest is 10% compounded annually, determine the capitalized cost of each type
of bridge.