CAPITALIZE

D
COST
CAPITALIZED COST
Capitalized cost is an application of perpetuity. The
capitalized cost of a project or structure is the sum of first cost
(FC) and the present worth of all future payments and
replacements which is assumed to continue forever.
CAPITALIZED COST
FORMULA:

NOTE: If RC is not specified, use RC = FC

EXAMPLE 1: CAPITALIZED COST
A machine costs P300,000, and must be replaced at the end
of 15 years. If the annual maintenance required is P5,000, find
the capitalized cost if money is worth 5% and the final salvage
value is P50,000.
EXAMPLE 1: CAPITALIZED COST
EXAMPLE 2: CAPITALIZED COST
At 6%, find the capitalized cost of a bridge whose cost is
P200M, and life is 20 years, if the bridge must be partially
rebuilt at a cost of P100M at the end of each 20 years.
EXAMPLE 2: CAPITALIZED COST
EXAMPLE 3: CAPITALIZED COST
The capitalized cost of a piece of equipment was found to be
P142,000. The rate of interest used in the computations was
12%, with a salvage value of P10,000 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.
EXAMPLE 3: CAPITALIZED COST
EXAMPLE 3: CAPITALIZED COST
EXAMPLE 4: CAPITALIZED COST
Corrosive liquids are transported through pipes in a factory. Ordinary
pipes will have an installment cost of P30,000 and their useful life is 3
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 installment cost of P55,000. Scrap value is zero in
each case. If money is worth 8% 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?
EXAMPLE 4: CAPITALIZED COST
EXAMPLE 4: CAPITALIZED COST
EXAMPLE 4: CAPITALIZED COST
 EXAMPLE 5: CAPITALIZED COST
A financial analysis of two types of bridges based on capitalized cost and on the following data
is to made:
BRIDGE A BRIDGE B
Initial Cost P200,000 P240,000
Cost of Renewal P200,000 P240,000
Salvage Value 0 P20,000
Annual Maintenance P1,000 NONE
Repairs every 5 year P10,000 P5,000
Life 30 years 40 years

If the rate of interest is 8% compounded annually, determine which has the lower capitalized cost.
EXAMPLE 5: CAPITALIZED COST
EXAMPLE 5: CAPITALIZED COST