1. Capitalized Cost Refers to the present worth of an infinite series A
Basic equation is : P = A i
Ex: Cap cost of $2,000 per yr forever at i=10% is $20,000
For finite life alternatives, convert all cash flow into
an A value over one life cycle and then divide by i

2. Capitalized Cost Example
Compare the machines shown below on the basis of
their capitalized cost. Use i =10% per year.
Machine A
Machine B
First cost,$
Annual cost,$/yr
Salvage value,$
Life, yrs
20,000
300,000
9000
7000
4000
----- 3 ∞
First convert machine A cash flow into AW and then divide by i:
AWA = -20,000(A/P,10%,3) – (A/F,10%,3)
= -$15,834
Cap CostA = -15,834/ 0.10 = -$158,340
Cap CostB = -300,000 – 7000/ 0.10 = -$370,000
(Select machine A)