Capitalized Cost Refers to the present worth of an infinite series A Basic equation is : P = A i Ex: Cap cost of $2,000 per yr forever at i=10% is $20,000 For finite life alternatives, convert all cash flow into an A value over one life cycle and then divide by i

Capitalized Cost Example Compare the machines shown below on the basis of their capitalized cost. Use i =10% per year. Machine A Machine B First cost,$ Annual cost,$/yr Salvage value,$ Life, yrs 20,000 300,000 9000 7000 4000 ----- 3 ∞ First convert machine A cash flow into AW and then divide by i: AWA = -20,000(A/P,10%,3) – 9000 + 4000(A/F,10%,3) = -$15,834 Cap CostA = -15,834/ 0.10 = -$158,340 Cap CostB = -300,000 – 7000/ 0.10 = -$370,000 (Select machine A)