Question

In: Economics

A short life (LS) project has a life of 5 years with an initial cost of...

A short life (LS) project has a life of 5 years with an initial cost of $5,628 and annual cost of $630 and interest rate of 4%. This project is to be compared with a long (infinite) life project (L:F). Find the capitalized cost CC for the short life project for the purpose of comparison.

Expert Solution

CC should be calculated as per the following steps:

Step 1: Get the PV first, which is the initial cost of $5628.

Step 2: Get the “A” value of annual cost of $630

Step 3: Convert the “A” value to the CC1.

Step 4: Make an addition of Step 1 and Step 3.

Hence,

“A” value = Annual cost (A/F, rate, year)

= - 630 (A/F, 4%, 5)

= - 630 × 0.18463 [get the factor from compound interest table]

= - 116.3169

CC1 = “A” value / rate

= - 116.3169 / 4%

= - 116.3169 / 0.04

= - 2,907.92

Therefore,

CC = PV + CC1

= - 5628 – 2907.92

= - 8,535.92 (Answer)

Rahul Sunny answered 7 months ago

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