Homework Course – 4
1. Compare the alternatives shown below the basis of their capitalized cost. Use I =14 %
Alternative U
Alternative W
First costs, $
8,500,000
50,000,000
Annual operating cost, $
8,000
7,000
Salvage value, $
5,000
2,000
Life, years
5
∞
2. Compare the machine shown below on the basis their capitalized cost using an interest
rate of 16% per year
Machine M
Machine N
First costs, $
31,000
43,000
Annual operating cost, $
18,000
19,000
Salvage value, $
5,000
7,000
Life, years
3
5
3. The first cost of a small dam is expected to be $3 million. The annual maintenance cost is
estimated to be $10,000 per year; a $35,000 outlay will be required every 5 years. In
addition an expenditure of $5000 in year 10 will be required, increasing by $1000 per
year through year 20, after which it will remain constant. If the damn is expected to last
forever, what will be its capitalized cost at an interest rate of 10% per year?