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

The capitalized cost will be "784,592".

Step-by-step 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 + (Annual \ operating \ cost )/(i) + (Bi-annual \ maintenance \ cost)/(i_(2))`

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

⇒
`=500,000+(20,000 )/(0.12) +(30,000)/(0.2544)`

⇒
`= 500000 + 166667 + 117925`

⇒
`= 784,592`

So that the above is the right answer.