A new municipal power plant is being built in Highfill, AR. The initial installa
ID: 2758754 • Letter: A
Question
A new municipal power plant is being built in Highfill, AR. The initial installation will cost $25 million. Experience shows that major repair and renovation will have to occur every 5 years (beginning at year 5) at a cost of $7.5 million. Annual operating and maintenance costs are $2 million per year, indefinitely. Based on a 5% time value of money, what will be the capitalized cost for indefinite operation of the power plant? Important:
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Explanation / Answer
Here we first need to compute PV of all expenses.
PV of annual operating and maintenance cost = maintenance cost / r
= 2,000,000 / 0.05
= 40,000,000
Effective rate for major repair = (1+r)^m -1
= (1+0.05)^5 -1
= 27.63%
PV of major repair = 7,500,000 / 0.2763
= 27144408.25
Total capitalized cost =25,000,000 +40,000,000 + 27,144,408.25
= 92,144,408.25
Here we first need to compute PV of all expenses.
PV of annual operating and maintenance cost = maintenance cost / r
= 2,000,000 / 0.05
= 40,000,000
Effective rate for major repair = (1+r)^m -1
= (1+0.05)^5 -1
= 27.63%
PV of major repair = 7,500,000 / 0.2763
= 27144408.25
Total capitalized cost =25,000,000 +40,000,000 + 27,144,408.25
= 92,144,408.25
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