Capital Recovery Cost

In most engineering situations, the capital cost has two components

I = the investment required at time 0, and
S = the salvage value received at time N.

Capital Recovery (CR) cost is the annual equivalent of the capital cost. CR is often
described from the banks point of view and is a function of the MARR, i%.
CR(i) = I(A/P, i, N) + S(A/F, i, N)
Because of the similarities between the formulas for (A/P, i, N) and
(A/F, i, N) , we can also calculate CR(i) using
CR(i) = (I S)(A/P, i, N) + iS, or
CR(i) = (I S)(A/F, i, N) + iI

Example
Your company is planning to manufacture a new product which requires a machine
that the company does not now own. The cost of the machine is $10,000, its life is
4 years, and its salvage value (at the end of the 4th year) is $1000. With this
machine, the new profit from each product is $12. What annual production makes
the investment worthwhile? The MARR is 10%.
Solution
We must find the capital recovery costs. The data are
I = $10,000 S = $1,000
MARR = 10% Useful life N = 4

CR = I(A/P, MARR, N) S(A/F, MARR, N)

= $10,000(A/P,10%,4) $1000(A/F, 10%, 4)
= $10,000(0.3155) $1000(0.2155)
= $3155 $215.50
= $2939.5

Using the other approaches, we get

CR = (I S)(A/P,10%,4) + (0.1)S
= $9,000 (0.3155) + (0.1)$1000
= $2839.5 + $100 = $2939.5

CR = (I S)(A/F,10%,4) + (0.1)I
= $9000 (0.2155) + (0.1)$10,000
= $1939.5 + $1000
= $2939.5

To be profitable, revenues must equal or exceed the capital recovery costs. Let X
be the number of products produced per year.
Revenues CR = $12X $2939.5 0. Solving for X, we get X 245 units.