2. A construction equipment is badly needed for a certain project so as to shorten the time of completion of the project. The equipment cost $1.2 million and has a life of 5 years, with a salvage value of $200,000 at the ed of its life. This machine can be bought with money borrowed at an interest rate of 20% per annum. Annual operating cost is $10,000. Determine the capitalized cost of using this equipment. A. $1,291,787 B. $1,291,677 C. $1,921,899 D. $1,192,998
Answer (1)
Answer:The capitalized cost is $1,921,899, which matches Option C.Step 1: Given InformationInitial Cost = $1,200,000 Annual Operating Cost = $10,000 Salvage Value = $200,000 Life Span = 5 years Interest Rate = 20% (0.20) Step 2: Compute Present Worth of Salvage Value[tex]PV_{\text{salvage}} = \frac{200,000}{(1.20)^5}[/tex][tex]PV_{\text{salvage}} = \frac{200,000}{2.48832} \approx 80,378.82[/tex]Step 3: Compute Capitalized Cost[tex] \small{CC = 1,200,000 + \frac{10,000}{0.20} - 80,378.82}[/tex][tex] \small{CC = 1,200,000 + 50,000 - 80,378.82}[/tex][tex]CC = 1,169,621.18[/tex]Step 4: Adjust for Perpetual Replacement[tex] \scriptsize{CC = 1,200,000 + 50,000 + 671,899.47}[/tex][tex] \large \boxed{CC = 1,921,899}[/tex]
