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صبا صلاح داود - اقتصاد هندسي
صبا صلاح داود - اقتصاد هندسي
University of Technology
Metallurgy
Branch : Industrial
Subject : Engineering economy and Value engineering
The capitalized cost can also be used for comparison of two or more mutually exclusive
alternatives which are assumed to serve perpetually. In this case the comparison of the
alternatives is made over same time period i.e. infinite period of time. The alternative that
shows lowest capitalized cost is selected as the best alternative. In the following examples,
the calculation of capitalized cost of an alternative and the comparison of mutually exclusive
.alternatives on the basis of capitalized cost are illustrated
Define
Capitalized cost is defined as the present worth of a constant annual cost over
an infinite analysis period. It can be shown that the factor (P/A,i%, n = infinity) is
equal to (1 / i ), with the interest rate i in decimal form.[1]
Methodology
1. For non-recurring costs, calculate PV using timevalue equivalence (find P)
2. For recurring costs (that last forever),
a) Convert recurring costs into annualized equivalent amount, A. [Using (A/F, i%, n)]
b) Use CC = A/i to find the capitalized cost.
3. Add PV of (1) and (2) together to find the total PV.
When high dollar value items are capitalized, expenses are effectively smoothed out
over multiple periods. This allows a company to not present large jumps in expense
in any one period from an expensive purchase of property, plant, or equipment. The
company will initially show higher profits than it would have if the cost was expensed
in full. However, this also means that it will have to pay more in taxes initially.
A public project has an initial cost of Rs.11000000 and annual operating and -2
maintenance cost of Rs.700000. Further the project will have one time major repair
work of Rs.2000000 at the end of 15 year. Find out the capitalized cost of the
.alternative if interest rate is 12% per year
Solution: The capitalized cost of the alternative is equal to sum of the initial cost,
present worth of one time major repair cost and capitalized cost of the annual
.operating and maintenance cost
;The total capitalized cost of the alternative is given by
Therefore the capitalized cost of the alternative for the public project is found to be
.Rs.17198733
: Referances
-1
https://global.oup.com/us/companion.websites/9780190296902/sr/interactive/worth/s
. /ec4
https://www.investopedia.com/terms/c/capitalizedcost.asp#:~:text=When%20high -2
.%20dollar%20value%20items,property%2C%20plant%2C%20or%20equipment
Chiu, C.Y., Park, C.S.: Fuzzy cash flow analysis using present worth criterion. -3
.The Engineering Economist 39(2), 113–138 (1994)