Question

A dam is being built that will cost $500,000. The dam will cost $20,000 per year to operate and will require a maintenance expense of $30,000 every other year beginning two years from now. The dam is expected to last 30 years. If interest is 12%, calculate the capitalized cost.

Answer 1

Answer:

The capitalized cost will be "784,592".

Explanation:

The given values are:

Initial cost = $500,000

Annual operating cost = $20,000

Interest, i = 12% i.e., 0.12

Effective Two year interest rate, i₂ = $(1.12)^2 - 1$

                                                         = $0.2544$

As we know,

$Capitalized \ cost = Initial \ cost + \frac{Annual \ operating \ cost }{i} + \frac{Bi-annual \ maintenance \ cost}{i_{2}}$

Now on putting the estimated values in the above expression, we get

⇒                       $=500,000+\frac{20,000 }{0.12} +\frac{30,000}{0.2544}$

⇒                       $= 500000 + 166667 + 117925$

⇒                       $= 784,592$

So that the above is the right answer.