Two incinerators are being considered by a waste management company. design a has an initial cost of $2,500,000, has annual operating and maintenance costs of $800,000, and requires overhauls every 5 years at a cost of $1,250,000. design b is more sophisticated, including computer controls; it has an initial cost of $5,750,000, has annual operating and maintenance costs of $600,000, and requires overhauls every 10 years at a cost of $3,000,000. using a 5%/year interest rate, determine the capitalized cost for each design and recommend which should be chosen.

Desing A:   23,024,370‬

Desing B:   22,520,274.6

It should purchase desing B as the capitalized cost is lower.

Explanation:

We consider annuity for the overhauls and then, perpetuity to consider this incinerators will last indefinitely.

maintenance cost: 800,000 / 0.05 = 16,000,000

Overhaul:

The company will need to fund 1,250,000 every 5 years. We need to determinate the annuity to obtain this future value:

PV1,250,000

time5

rate0.05

C  $  $ 226,218.498

Then at perpetuity:

$ 226,218.498  / 0.05 = 4,524,370

Desing A capitalized cost:

2,500,000 + 16,000,000 + 4,524,370 = 23,024,370‬

We do the same for Desing B:

investment: 5,750,000

maintenance: 600,000 / 0.05 = 12,000,000

overhaul:

C  $ 238,513.725

238,513.73/0.05 =  4,770,274.6

Capitalized cost: 5,750,000 + 12,000,000 + 4,770,274.6 = 22,520,274.6‬

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