We want to donate a marble birdbath to the city park as a memorial to cats. We a

Question

We want to donate a marble birdbath to the city park as a memorial to cats. We also want to set up a perpetual care fund to cover future expenses “forever”. The initial cost of the bath is $5000. Routine annual operating costs are $200 per year, but every fifth year the cost will be $500 to cover major cleaning and maintenance as well as operation.

a)What is the capitalized cost of this project if the interest rate is 8%.

b)How much is the present worth of this project if it is to be demolished after 75 years? The final $500 payment in the 75th year will cover the year’s operating cost and the site reclamation.

Explanation / Answer

a) P = initial cost = 5000 + operating cost 200 (1/0.08 )

=5000 +2500 = $ 7500

b) Present value = 500 (1/0.8 ) = 500 * 12.5 = $ 6250/25 = $ 250

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