Capitalized Cost

Engineering Economy
 Capitalized Cost
 The capitalized Cost of an asset is the sum of the first cost and present worth of
all future payments and replacements which are assumed to continue for a long
time of perpetual.
 CC = Capitalized cost
 FC= First cost
 OM= Operation and maintenance cost
 RC= Replacement Cost
 SV= Salvage Value
 i= interest rate
 n=number of years/period
Common type of CC:
1.) First Cost = Perpetual and Maintenance Cost
 CC = FC + for annual uniform payments
 CC = FC + for uniform non-yearly(n>1) payments
2.) First Cost + PW of Perpetual Replacement Costs
 CC = FC +
3.)First Cost + PW of Perpetual Replacement Costs + PW of OM
 CC = FC + +
Problem 1:
Calculate the capitalized cost of an asset that initially costs 2,500,000 but
requires an annual maintenance cost of 20,000.00 in order for it to last longer.
Use i= 5.5%
Solution:
First cost (FC) = 2,500,000.00
Operation and maintenance Cost(OM) = 20,000.00
CC= 2,500,000 + P20k
Note: The 20,000 annual payment are perpetual
Therefore P = =
CC = 2,500,000 +
CC = 2,500,000 +
CC = 2,863,636.36 php
PROBLEM 2:
A hotel installed curtains on its windows including its rods at a total cost of 500,000.00. These curtain will be replaced every 4 years at a cost of 400,000.00 whilst the old
curtains can be sold at 50,000.00 upon replacement. Find the capitalized cost of these expenses if money is 4% yearly.

Solution: 400k
First Cost = 500,000.00 SV = 50,0000 A = 400,000 every 4 years
Consider the interest rate i= 4% per year
P5ok + CC = 500,000 +P400k
( 1 + yearly interest) = (1 + i n ) n

(1 + 4%) 4 = ( 1 + in )
in= 16.99% every 4 years
CC

500k

P50k + CC = 500,000 + P400k Another Solution:

Psv + CC = FC + Prc
Where: P = CC = FC + Prc –Psv
CC =FC +

+ CC = 500,000 + CC = 500,000 +

CC = 2,560,537.90 //ans CC = 2,560,537.90 //ans

 Problem 3:
A dam project of the Philippine Government was estimated to cost 340,000 during its
construction. It was also determined that the dam will required 2,000,000 maintenance and
operating expenses every year and an additional cost of 16,000,000 of major repairs every 10
years. What will be the capitalized cost of all these expenses if money is worth 7% per year?
Solution:
Consider that FC = CC1 = 340,000,000
CC2 = = = 28, 571,428.57
CC3 = = = = 15,543,429.19
CCT = CC1 + CC2 + CC3
CCT = 385,114,857.80 //ans
Problem 4 Case 3)
A passenger train was bought at 36,000,000 and will incur 1,500,000 of annual operation and maintenance expense in the first 5 years and will increase to 2,500,000 thereafter
until it reaches its economic life of 20 years. Find the capitalized cost at i= 5% yearly if the train will have a salvage value of 3,000,000 and would be replaced by a new one at
the end of its economic life with the same maintenance and operating expenses.

Solution:
FC = 36,000,000
OM (1-5yrs) = 1,500,000
OM(6-20 yrs) = 2,500,000
SV = 3,000,000
Replacement Cost (RC) = FC (if there is no given RC)
n = 20 years
i =5% annually
CC1 = FC =36,000,000
Consider replacement cost (RC) and SV
CC2= = = 19,960,107.55
 [

[ ] = 6,494,215.01

[]

[]

= 25, 949,145.10

From the cash flow diagram there will be a single payment only

= = 20,331,834.18

OM = P1.5M + P2.5M

OM = 26,836,049.19 every 20 years

CC3 = OM +

CC3 = 26,836,049.19 + = 43,051,831.83

CCT= CC1 + CC2 + CC3

CCT = 36,000,000 + 19,960,107.55 + 43,051,831.83

CCT = 99,011,939.33 total capitalized cost.