ME 291

Engineering

ME-291 Engineering Economy

Economy
Lecture 15

Capitalized Cost Calculation and Analysis

Faculty of Mechanical Engineering

Ghulam Ishaq Khan Institute, Topi, Swabi
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 Future Worth Analysis

• The future worth analysis (FW) of an alternative may be

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determined directly from the cash flows by determining the
future worth value, or by multiplying the PW value by the
F/P factor, at the established MARR.
• Therefore, FWA is an extension of PW Analysis.
• FW values is especially applicable to large capital
investment decisions when a prime goal is to maximize the
future wealth of a corporation’s stockholders.
• It is often utilized if the assets might be sold or traded at
some time after its start-up, but before the expected life is
reached.
• Also FW can be used for the projects that will not come
online until the end of the investment period. e.g. electric
generation facilities, roads, hotels, can be analyzed using
the FW value of investment commitments made during
construction.

© Faculty of Mechanical Engineering, GIKI

 Future Worth Analysis

• Once the future value is determined, the selection

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guideline is the same as the PW analysis;
• FW ≥ 0 means the MARR is met or exceeded (one
alternative).
• For two or more mutually exclusive alternatives, select
the one with the numerically larger (largest) FW value.

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 Example 5.3

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© Faculty of Mechanical Engineering, GIKI
 Capitalized cost (CC)

• Capitalized cost (CC) is the present worth of an alternative

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that will last “for ever”.
• Public sector projects such as bridges, dams, irrigation
systems, and rail roads fall into this category.
• The formula to calculate CC is derived from the relation
P=A(P/A , i , n), where

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 Capitalized Cost (CC)

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• The cash flow in a capitalized cost calculation are usually of
two types: recurring, also called periodic, and nonrecurring.
• An annual operating cost and rework after certain number of
periods are examples of recurring cash flows.
• Nonrecurring cash flows are the initial investment amount in
year 0 and one-time cash flow estimates at future times.

© Faculty of Mechanical Engineering, GIKI

 Procedure for CC calculation

1. Draw a cash flow diagram showing all nonrecurring (one-

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time) cash flows and at least two cycles of all recurring
(periodic cash flows).
2. Find the present worth of all nonrecurring amounts. This is
their CC value.
3. Find the equivalent uniform annual worth (A value) through
one life cycle of all recurring amounts. Add this to all other
uniform amounts occurring in year 1 through infinity. This
results in a total equivalent uniform annual worth (AW).
4. Divide the AW obtained in step-3 by the interest rate i to
obtain a CC value.
5. Add the CC values obtained in step 2 and 3.

Drawing a cash flow diagram is more important in CC

calculation, because it helps separate nonrecurring and
recurring amounts.

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 Example 5.4

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© Faculty of Mechanical Engineering, GIKI