CAPITALIZED COST

Definition:

Capitalized Cost is the sum of the first cost present worth for the perpetual operation and maintenance
expenses and the present worth for perpetual expenses.

Assumptions:

1. The business has perpetual life

2. The business is bigtime

S = 1T S = 1T

0 1 2 3 4 5 L = 300 L=∞

FC = 200B 0/M 0/M 0/M 0/M 0/M 0/M 0/M

P = 300B i = 10%

X = 400B

FC = First Cost

= the cost in putting up the business

= Building, Lupa, Taxes, Insurance

P = Present worth or perpetual operation and maintenance expenses

x/s = the present worth for perpetual replacement expenses

CC = FC + P+ X

CC = 200B + 300B +400B

CC = 900
 S

Ordinary Annuity
0 1 2 3 4 5 L-1

i i i i i i i i

xi xi xi xi xi xi xi
x

𝐴
I = 10 % F= 𝑖 [(1 + 𝑖)𝑁 -1]
𝑋𝑖
I = Pin S= 𝑖
[(1 + 𝑖)𝐿 − 1]
𝑆
I = Xi X=
[(1+𝑖)𝐿 −1]

𝑆
CC = FC + P +
[(1+𝑖)𝐿 −1]

S = the amount needed to replace the property at the end of Useful Life.

i = life if the property in one year

𝑆
Case I: CC = FC + P +
[(1+𝑖)𝐿 −1]

Case II: CC = FC + P
𝑆
Case III: CC = FC + [(1+𝑖)𝐿 −1]
Example 1:

A research laboratory is purchased at 100M and is expected to last 20 years with a replacement
cost of ₱200M. Operation and maintenance expenses are as follows: ₱10M each year for the first 5
years, ₱20M each year for the next 10 years and ₱50M thereafter. If money worth 12%, compute the
capital cost.

Solution:

CC = ?

FC = ₱100M

L = 20 Years

S= ₱200M

I = 12%
𝑆
CC = FC + P +
[(1+𝑖)𝐿 −1]

P=?

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 . . . 20

10M 10M 20M 20M 50M 50M

0/M
𝐴 𝐴 𝐴
𝑃𝐼 = 𝑖 [1 − (1 + 𝑖)−𝑁 ] 𝑃𝐼𝐼 = 𝑖 [1 − (1 + 𝑖)−𝑁 ] 𝑃𝐼𝐼𝐼 = 𝑖

At 0:

P = 𝑃𝐼 + 𝑃𝐼𝐼 (1.12)−5 + 𝑃𝐼𝐼𝐼 (1.12)−15

10000000 20000000 50000000
P=[ 0.12
] [1-(1.12)−5 ] + 0.12
[1 − (1.12)−10 ] (1.12)−5 +
0.12
(1.12)−15

P = 176, 292, 970

200,000,000
CC = 100,000,000 + 176,292,970 + [(1.12)20 −1]

CC = ₱ 299, 424, 270

Example 2:

The will of a wealthy philanthropist left ₱ 5,000,000 to establish a perpetual charitable

foundation. The foundation trustees decided to spend ₱ 1,200,00 to provide facilities immediately and
to provide ₱ 100, 000 of capital replacement at the end of each 5-year period. If the invested funds
earned 12% per annum, what would be the year end amount available in perpetuity from the
endowment for charitable purposes?

Solution:

5M S = 100,000 S = 100,000

0 1 2 3 4 L = 5yrs 6 7 8 9 L = 5yrs 11 12 ∞

FC = 1.2M A A A A A A A A A A A A A

𝑆
X = (1+𝑖)𝐿 −1 i = 10%

𝐴
P= 𝑖

𝑆
CC = FC + P + [(1+𝑖)𝐿 −1]

𝐴 𝑆
CC = FC + 𝑖
+ [(1+𝑖)𝐿 −1]

𝐴 100,000
5,000,000 = 12,000,000 + 0.12 + [(1.12)5 −1]

A = ₱ 440,259.03