ENGR 3360U Winter 2014

Unit 5
Present Worth Analysis
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01

Unit 5 Present Worth Analysis

Change Record
2014-I-01 Initial Creation
Text Chapter 5

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

5.4 Capitalized Cost Calculations and Analysis

CAPITALIZED COST- Present worth of a
project that lasts forever. Analysis method
for:
Government or public projects;
Roads, dams, bridges, project that basically
possess infinite life;

Infinite analysis period:

n in the problem is either very long,
indefinite, or infinity.
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

P/A Factor as n approaches infinity

The P/A factor is:

On the right hand

side, divide both
numerator and
denominator by
(1+i)n

1
1

(1 i ) n
P A

If n approaches the
above reduces to:
Let CC represent
capitalized cost
Annual amount forever is
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(1 i ) n 1
P A
n
i
(1

i
)

A
P
i

A
CC
i

A = Pi = (CC)i

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Example 5.3
How much should you set aside to pay
$50/year maintenance for your gravestone,
at 4%?
CC = A/i = 50/0.04 = $1,250
You should set aside $1,250. The principle
sum remains undiminished after the annual
disbursement is made.

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Examples of capitalized cost analyses

Example 4 -- Finds the CC and A values of a
county government software system expected to be
used for the indefinite future
Example 5 -- Compares the CC values for 2
indefinite-life bridge designs suspension and truss
Example 6 -- Uses CC method to compare
short life (5 year) and very long life (indefinite)
alternatives

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Example 5.4
Problem Description

The property appraisal department for Halifax has just installed

new software to track residential market values for property tax
computations. The manager wants to know the total equivalent
cost of all future costs incurred when the three county judges
agreed to purchase the software system.
If the new system will be used for the indefinite future, find the
equivalent value (a) now and (b) for each year hereafter.

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

CC Example - continued
Problem Parameters:

The system has an installed cost of $150,000 and an additional

cost of $50,000 after 10 years.
The annual software maintenance contract cost is $5000 for the
first 4 years and $8000 thereafter.
In addition, there is expected to be a recurring major upgrade
cost of $15,000 every 13 years. Assume that i = 5% per year for
county funds.

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

CC Example - continued
Determine:

1. The present worth equivalent cost at 5%;

2. The future annual amount ($/year) to which the
county will be committed.

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

First Step - Cash Flow

5

10

13

26

5,000
8,000

15,000

15,000

50,000
150,000

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Second Step Non-recurring Costs

Find the present worth of all nonrecurring costs
Call this amount CC1
Nonrecurring costs are:
$150,000 time t = 0 investment;
$50,000 at time t = 10.
i = 5% per year.

CC1 = -150,000 - 50,000(P/F,5%,10) = $-180,695

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Third Step 15,000 recurring 13 years

CONVERT the recurring costs into an annualized equivalent
amount.
Call this A1
For the problem, we have $15,000 every 13 years;
Using the (A/F) factor we have:

A1 = -15,000(A/F,5%,13) = $-847.00
Important: This same value applies to all other 13-year time
periods as well!
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Step Four find the CC

The capitalized cost for the two annual maintenance
cost series are determined next:
Consider a series of $-5000 from now to infinity and
find the present worth of $-3000 to infinity, from year
5 on;
CC2 = -3000(P/F,5%,5)/0.05 = -47,010
CC3 = (A1 + A2)/I = (-847 5000)/0.05 = -116,940

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Step Five
CCt = -180,695 47,010 116,940
= - 344,645

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

All Together
5

10

13

26

CC3 = (A1 + A2)/I = (-847 5000)/0.05 = -116,940

5,000

CC2 = -3000(P/F,5%,5)/0.05 = -47,010

8,000

15,000

15,000

A1 = -15,000(A/F,5%,13) = $847.00

50,000
150,000
CC1 = -150,000 - 50,000(P/F,5%,10) = $-180,695

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Example 5.5 Public Works Example

Good Example of a Public Sector type problem:

Two sites are currently under consideration for a bridge to cross

a river in Ontario. The north site, which connects a major
provincial highway with a loop around the city, would alleviate
much of the local through traffic. The disadvantages of this site
are that the bridge would do little to ease local traffic
congestion during rush hours, and the bridge would have to
stretch from one hill to another to span the widest part of the
river, railroad tracks, and local highways below. This bridge
would therefore be a suspension bridge. The south site would
require a much shorter span, allowing for construction of a truss
bridge, but it would require new road construction.
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Public Works Example cont.

The suspension bridge will cost $50 million with annual
inspection and maintenance - costs of $35,000. In addition, the
concrete deck would have to be resurfaced every 10 years at a
cost of $100,000.
The truss bridge and approach roads are expected to cost $25
million and have annual maintenance costs of $20,000. The
bridge would have to be painted every 3 years at a cost of
$40,000. In addition, the bridge would have to be sandblasted
every 10 years at a cost of $190,000. The cost of purchasing
right-of-way is expected to be $2 million for the suspension
bridge and $15 million for the truss bridge. If the IR is 6%,
what are the costs?
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Bridge Alternatives: Suspension

Cash Flow Diagrams
Suspension Bridge Alternative
0

2
$35,000/yr

$50 Million

4 .....

10

11 ..

i = 6%/year
$100,000

$2 Million

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Suspension Bridge Analysis

CC1= -52 million at t = 0.

A1 $35, 000
A 2 100, 000( A / F , 6%,10) $7,587
A1 A2 35, 000 (7,587)
CC2

$709, 783.
i
0.06

Total CC suspension bridge is:

-52 million - 709,783 = -$52.71 million

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Truss Bridge Alternative

Truss Design:
//////

10

11 ..

A. Maint. = $20,000/yr

n=
Paint: -40,000

-25M +(-2M)

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Paint: -40,000

i = 6%/year

Paint: -40,000
Sandblast: -190,000

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Truss Bridge Alternative

CC1 Initial Cost:
-$25M + (-2M) = -$27M
Truss Design:
//////

10

11 ..

A. Maint. = $20,000/yr

n=
Paint: -40,000

-25M +(-2M)

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Paint: -40,000

i = 6%/year

Paint: -40,000
Sandblast: -190,000

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Truss Bridge Alternative

2. Annual Maintenance is already an A amount
so: A1 = -$20,000/year
Truss Design:
//////

10

11 ..

A. Maint. = $20,000/yr

n=
Paint: -40,000

-25M +(-2M)

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Paint: -40,000

i = 6%/year

Paint: -40,000
Sandblast: -190,000

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Truss Bridge Alternative

3, A2: Annual Cost of Painting

i = 6%/year

Truss Design:

//////

10

11 ..

A. Maint. = $20,000/yr

n=

Use A/F,6%,3
Paint: -40,000

Paint: -40,000

Paint: -40,000
Sandblast: -190,000

-25M +(-2M)

For any given cycle of painting, compute:

A2 = -$40,000(A/F,6%,3) = -$12,564/year
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Truss Bridge Alternative

3, A3 Annual Cost of Sandblasting
i = 6%/year

Truss Design:

//////

10

11 ..

A. Maint. = $20,000/yr
Use The A/F,6%,10 to convert to an equivalent $/year amount
Paint: -40,000

Paint: -40,000

n=

Paint: -40,000
Sandblast: -190,000

-25M +(-2M)

For any given cycle of Sandblasting, compute

A3
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= -$190,000(A/F,6%,10) =-$14,421
Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 5 Present Worth Analysis

Bridge Summary for CC(6%)

CC2 = (A1+A2+A3)/i
CC2 = -(20,000+12,564+14,421)/0.06
CC2 = $783,083/year
CCTotal = CC1 + CC2 =-40.783 million

CCSuspension = -$52.71 million

CCTruss - -40.783 million
Select the Truss Design!

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco