QIJA new highway is being evaluated at an interest rate of55

QIJA new highway is being evaluated at an interest rate of-5.5%. Use capitalized cost to determine which plan is most suitable $28M Initial Cost Annual maintenance periodic major maintenance periodic major maintenance done every n years $18M 342,000 238,000 1.6 M 1.2M 18

Solution

Case A

Capitalized cost = -18,000,000 - 1,600,000 [(1/1.055)^12] - 342,000 / 0.055

or Capitalized cost = -18,000,000 - 841570.43 - 6218181.82

or Capitalized cost = -25,059,752.25

Case B

Capitalized cost = -28,000,000 - 1,200,000 [(1/1.055)^18] - 238,000 / 0.055

or, Capitalized cost = -28,000,000 - 457759.06 - 4327272.72

or, Capitalized cost = -32,785,031.79

Since the absolute value of the present value of capitalized cost is less in case A we will choose Plan A over Plan B.

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