Question

city is spending $20 million on a new sewage system. The expected life of the system is 40 years, and it will have no market value at the end of its life. Operating and maintenance expenses for the system are projected to average $0.6 million per year. If the city’s MARR is 8% per year, what is the capitalized worth of the system? The study period is 100 years. (5.3)

Answer 1

capitalized worth = $13,475,000

Step-by-step explanation:

Capitalized worth = annual worth / interest rate

• annual worth = [initial outlay x discrete compounding factor (A/P, 8%, 40 periods)] - annual maintenance cost = ($20,000,000 x 0.0839) - $600,000 = $1,678,000 - $600,000 = $1,078,000
• interest rate = 8%

capitalized worth = $1,078,000 / 8% = $13,475,000

Capitalized worth measures the present value of a project that should last a very long time.