6) Two incinerators are being considered by a waste management company. Design A

Question

6) Two incinerators are being considered by a waste management company. Design A has an initial cost of $2,325,000, has annual operating and maintenance costs of $800,000, and requires overhauls every 5 years at a cost of $750,000. Design B is more sophisticated, including computer c costs of $70 10%/year interest rate, determine the capitalized cost for each design. (15 pts). initial cost of s6,100,000, has annual operating and maintenance 0,000, and requires overhauls every 10 years at a cost of $2,725,000. Using a

Explanation / Answer

ANSWER:

FIRST WE NEED TO UNDERSTAND WHAT ARE CAPITALIZED COSTS AND THEY ARE THE COSTS THAT ARE RECOGNISED OVER A PERIOD OF TIME VIA DEPRECIATION AND AMMORTIZATION.

DESIGN A:

INITIAL INVESTMENT: $2,325,000

ANNUAL O AND M = $800,000

OVERHAULING COST = $750,000 (EVERY 5 YEARS)

N = INFINITY

I = 10%

CAPITALISED COST (PW) = 2,325,000 + 800,000 (P/A,I,N) + 750,000 (A/F,I,N) (1 / N )

N FOR ANNUAL O AND M WILL BE INFINITY AND FOR OVERHAULING 5 YEARS ( GIVEN)

AND 800,000(P/A,10%,INFINITY) = 800,000 ( 1 / 10%)

PW = 2,325,000 + 800,000 (1 / 10%) + 750,000 (A/F,10%,5) (1 / 10% )

PW = 2,325,000 + 8,000,000 + 750,000 * 0.1638 * 10

PW = 2,325,000 + 8,000,000 + 1,228,500

PW = $11,553,500

DESIGN B :

INITIAL INVESTMENT: $6,100,000

ANNUAL O AND M = $700,000

OVERHAULING COST = $2,725,000 (EVERY 5 YEARS)

N = INFINITY

I = 10%

CAPITALISED COST (PW) = 6,100,000 + 700,000 (P/A,I,N) + 2,725,000 (A/F,I,N) (1 / N )

N FOR ANNUAL O AND M WILL BE INFINITY AND FOR OVERHAULING 10 YEARS ( GIVEN)

AND 700,000(P/A,10%,INFINITY) = 700,000 ( 1 / 10%)

PW = 6,100,000 + 700,000 (1 / 10%) + 2,725,000 (A/F,10%,10) (1 / 10% )

PW = 6,100,000 + 7,000,000 + 2,725,000 * 0.0627 * 10

PW = 6,100,000 + 7,000,000 + 1,708,575

PW = $14,808,575

SO THE CAPITALIZED COST FOR DESIGN A AND B ARE $11,553,500 AND $14,808,575 RESPECTIVELY.

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