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(
+
= (
(
(
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CE533 - PW Analysis
4.4 Derivation - Continued
1 A
P A
i i
(
= =
(
Or,
CC(i%) = A/i
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CE533 - PW Analysis
4.4 CAPITALIZED COST
Assume you are called on to maintain a
cemetery site forever if the interest rate
= 4% and $50/year is required to
maintain the site.
Find the PW of an infinite annuity flow
1 2 3 4 5 .. N=inf.
A=$50/yr
P = ?
..
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CE533 - PW Analysis
4.4 CAPITALIZED COST
P
0
= $50[1/0.04]
P
0
= $50[25] = $1,250.00
Invest $1,250 into an account that
earns 4% per year will yield $50 of
interest forever if the fund is not
touched and the i-rate stays constant.
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CE533 - PW Analysis
4.4 CAPITALIZED COST: Endowments
Assume a wealthy donor wants to endow a
chair in an engineering department.
The fund should supply the department with
$200,000 per year for a deserving faculty
member.
How much will the donor have to come up
with to fund this chair if the interest rate =
8%/yr.
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CE533 - PW Analysis
4.4 CAPITALIZED COST: Endowed Chair
The department needs $200,000 per year.
P = $200,000/0.08 = $2,500,000
If $2,500,000 is invested at 8% then the
interest per year = $200,000
The $200,000 is transferred to the department,
but the principal sum stays in the investment to
continue to generate the required $200,000
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CE533 - PW Analysis
EXAMPLE
Calculate the Capitalized Cost of a
project that has an initial cost of
$150,000. The annual operating cost is
$8,000 for the first 4 years and $5000
thereafter. There is an recurring
$15,000 maintenance cost each 15
years. Interest is 15% per year.
4.4 Capitalized Cost Example
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CE533 - PW Analysis
$4,000
0 1 2 3 4 5 6 7 15 30
$150,000
$8,000
$15,000 $15,000 $15,000 $15,000
i=15%/YR
N=
How much $$ at t = 0 is required to fund this
project?
The capitalized cost is the total amount of $ at t
= 0, when invested at the interest rate, will
provide annual interest that covers the future
needs of the project.
4.4 Cash Flow Diagram
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CE533 - PW Analysis
4.4 CAPITALIZED COST - Example
Continued
1. Consider $4,000 of the $8,000 cost
for the first four years to be a one-time
cost, leaving a $4,000 annual operating
cost forever.
P
0
= 150,000 + 4,000 (P|A, .15, 4) =
$161,420
2.855
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CE533 - PW Analysis
4.4 CAPITALIZED COST - Continued
Recurring annual cost is $4,000 plus the
equivalent annual of the 15,000 end-of-
cycle cost.
.
0 15 30 45 60 ..
Take any 15-year period and find the equivalent
annuity for that period using the F/A factor.
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CE533 - PW Analysis
4.4 CAPITALIZED COST: One Cycle
Take any 15-year period and find the equivalent
annuity for that period using the F/A factor
$15,000
A for a 15-year period
0 15 30 45 60 ..
.
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CE533 - PW Analysis
4.4 CAPITALIZED COST
2. Recurring annual cost is $4,000 plus
the equivalent annual of the 15,000
end-of-cycle cost.
A= 4,000 + 15,000 (A|F, .15, 15)
= 4,000 + 15000 (.0210) = $5,315
Recurring costs = $5,315/i =
5,315/0.15 =$3,443/yr
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CE533 - PW Analysis
4.4 CAPITALIZED COST
Capitalized Cost = 161,420 + 5315/.15
= $196,853
Thus, if one invests $196,853 at time t
= 0, then the interest at 15% will
supply the end-of-year cash flow to
fund the project so long as the principal
sum is not reduced or the interest rate
changes (drops).
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CE533 - PW Analysis
4.6 USING EXCEL FOR PW ANALYSIS
General format to determine the PW is;
PW = P PV (i%,n,A,F)
When different-life alternatives are
evaluated using LCM; develop NPV function
PW = P +
NPV(i%,year_1_CF_cell:last_year_CF_cell)
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CE533 - PW Analysis
Summary: Present Worth
PW represents a family of methods
Annual worth
Future Worth
Capitalized Cost
Life-cycle cost analysis application
Bond Problems application
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CE533 - PW Analysis
End of Chapter 4