Question

Capitalized cost is defined as the present worth of infinite expenditures to construct, maintain and renew all alternatives. This method is usually used in comparisons involving very long term considerations. On a capitalized cost basis, the income or expenditures are calculated as though they continue in perpetuity or, in other words, forever. The capitalized basis of evaluation consists of finding a single sum in the present whose return at a given rate of interest will be equivalent to expenditures repeated in perpetuity. Example: A railroad bridge must be replaced every 30 years àt a cost of $100,000. It costs $8,000/year to maintain the bridge. What is the maximum cost of a permanent embankment to replace the bridge to make the replacement economically worthwhile? The embankment will still require maintenance of $3,500/year. Assume interest at 5% compounded annually.

Answer 1

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