Question

Calculate the capitalized cost of a project that has an initial cost of P4,000,000 and an additional cost of P100,000 at the end of every 10 yrs. The annual operating costs will be P100,000 at the end of every year for the first 4 years and P160,000 thereafter. In addition, there is expected to be recurring major rework cost of P350, 000 every 13 yrs. Assume i =12%

Answer 1

Answer:

Initial Cost IC = 4,000,000

Addition Cost AC = 100,000 for Term n = 10 Years

Operating Cost (MC) PA = P 100,000 for the first 4 years

Operating cast after 4 years PF = 160,000

Rework Cost (CR) = P350,000 after every n=13 years

i = 12%

We can draw a cashflow diagram here:

Present worth of nonrecurring cost of 4,000,000 now and 100,000 in the year 10 at i= 12%, Lets assume it CC₁;

CC₁ = - 4000000 - 100000 (P/F, 12%,10)

= - 4000000 - 100000 (0.3220)

CC₁ = - 4032200

Now we can convert the rework cost 350,000 to an Annuity A value over the first cycle of 13 years, CC₂ value can be computed.

A = -350,000 (A/F,12%,13) .03568

A = -350000 (0.03568)

A = -12488

CC₂ = A/i --------------------------------------(a)

CC₂ = -12488 /.12

CC₂ = -104066.67

To find the capitalized cost of Annual operating cost we can consider the -100000 an A series;

Hence the CC₃ = -100000 / .12 by equation -(a)

CC₃ = -833333.33

Similarly, additional operation cost after 4 years, we can take a series of - 60,000

Hence CC₄ can be calculated as

CC₄ = -60,000/.12 (P/F, 12%,4)

CC₄ = -500000 (0.6355)

CC₄ =-317750

The total capitalized cost is the sum of all 4 CC_T values

CC_T = CC₁ + CC₂ + CC₃ + CC₄

CC_T =  - 4032200 -104066.67 -833333.33 -317750

CC_T = -5287350

Hence the capitalized Cost of the project is - 5287350

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