Capitalized Cost

As a natural extension and application of perpetuity we have capitalized cost. The capitalized
cost of any property is the sum of the first cost and the present worth of all costs of
replacement, operation and maintenance for a long time and forever.

𝑂𝑀 (𝑅𝐶 − 𝑆𝑉)
𝐶𝐶 = 𝐹𝐶 + +
𝑖 (1 + 𝑖) − 1
Where:

CC  capitalized cost
FC  first cost
L  useful life
RC  reconstruction budget/replacement cost
OM  operation and maintenance
𝑆𝑉  salvage/scrap value

Case 1: No replacement, only maintenance and/or operation every period.

𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝐶𝑜𝑠𝑡 = 𝐹𝑖𝑟𝑠𝑡 𝐶𝑜𝑠𝑡 + 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑒𝑟𝑝𝑒𝑡𝑢𝑎𝑙 𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒

𝑂𝑀
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝐶𝑜𝑠𝑡 = 𝐹𝐶 +
𝑖

Case 2: Replacement only, no maintenance and/or operation.

𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝐶𝑜𝑠𝑡 = 𝐹𝑖𝑟𝑠𝑡 𝐶𝑜𝑠𝑡 + 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑎𝑙 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡

(𝑅𝐶 − 𝑆𝑉)
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝐶𝑜𝑠𝑡 = 𝐹𝐶 +
(1 + 𝑖) − 1

Sample Problem:
1. A manufacturing plant installed a new boiler at a total cost of ₱150,000 and is estimated
to have a useful life of 10 years. It is estimated to have a scrap value at the end of its useful
life of ₱5,000. If interest is 12% compounded annually, determine its capitalized cost.

Given:
FC=₱150,000
SV=₱5,000
L=10 yrs
i=12%

Req’d: CC

Sol’n:
 𝑂𝑀 (𝑅𝐶 − 𝑆𝑉)
𝐶𝐶 = 𝐹𝐶 + +
𝑖 (1 + 𝑖) − 1

(𝑅𝐶 − 𝑆𝑉)
𝐶𝐶 = 𝐹𝐶 +
(1 + 𝑖) − 1

(₱150,000 − ₱5,000)
𝐶𝐶 = ₱150,000 +
(1 + 0.12) − 1

𝐶𝐶 = ₱218,855.87

2. A research foundation wishes to set up a trust fund earning 10% compounded annually
to
a. Provide ₱2,000,000 for the lot and building and ₱1,000,000 for the initial equipment
of a structural engineering and materials laboratory;
b. Pay ₱400,000 for the annual operating costs every year, and
c. Pay ₱500,000 for the purchase of new equipment and replacement of some
equipment every 5 years beginning 5 years from now.
How much money should be paid into the fund for the building and equipment and to pay
for perpetual operation and equipment replacement?

Given:
FC=₱2,000,000+₱1,000,000=₱3,000,000
OM=₱400,000
RC=₱500,000
L=5 yrs
i=10%

Req’d: CC

Sol’n:
𝑂𝑀 (𝑅𝐶 − 𝑆𝑉)
𝐶𝐶 = 𝐹𝐶 + +
𝑖 (1 + 𝑖) − 1

𝑂𝑀 (𝑅𝐶 − 𝑆𝑉)
𝐶𝐶 = 𝐹𝐶 + +
𝑖 (1 + 𝑖) − 1

₱400,000 (₱500,000)
𝐶𝐶 = ₱3,000,000 + +
0.1 (1 + 0.1) − 1

𝐶𝐶 = ₱7,818,987.40