Homework Answers
Capitalized Project Cost is actually the total present value of the Annual Operating Costs and the Major Maintenance Costs discounted at the given interest rate of 8% per annum.
Project Tenure = Infinite, Annual Operating Costs = O = $ 100000, Major Maintenance Cost = M = $ 2 million every 30 years
Present Value of Annual Operating Costs = P1 = 100000 / 0.08 = $ 1250000
Present Value of Major Maintenance Costs = P2 = 2000000 / [1+0.08]^(30) + 2000000 / [1+0.08]^(60) +............. to infinity
Replacing (1+0.08)^(30) by (1+k) in the above equation, we get:
P2 = 2000000 / (1+k) + 2000000 / (1+k)^(2) +............... + to infinity = 2000000 / k = 2000000 / [(1+0.08)^(30) - 1] (as k = [(1.08)^(30)-1] )
P2 = 2000000 / [(1.08)^(30)-1] = $ 220685.835
Total Capitalized Cost = P1 + P2 + Initial Cost = 1250000 + 220685.835 + 6000000 = $ 7470685.835
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