Determine the capitalized cost of a research laboratory which requires P5,000,000 for original construction: P100,000 at the end of every year for the first 6 years and then P120,000 each year thereafter for operating expenses, and P500,000 every 5 years for replacement of equipment with Interest at 12% per annum?

Original Construction Cost = 5,000,000

Annual Operating Cost from year 1 to 5 = 100,000

Annual Operating Cost after 5 years = 120,000

Replacement Cost at every 6 years = 500,000

Interest Rate = 12%
Calculate Capitalized Cost.

Step 1 – PW of Annual Operating Cost

PW = 100,000 (P/A, 12%, 5) + (120,000 ÷ 0.12) (P/F, 12%, 5)

PW = 100,000 (3.604776) + 1,000,000 (0.567426)

PW = 927,903.6

Step 2 – PW of Replacement Cost

PW = [500,000 (A/F, 12%, 6)] ÷ 0.12

PW = [500,000 (0.123225)] ÷ 0.12

PW = 513,437.5

Step 3 – Calculate Capitalized Cost

CC = 5,000,000 + 927,903.6 + 513,437.5

CC = 6,441,341.1

The capitalized cost will be $6,441,341.1