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ainster31
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Homework Statement
A municipal contractor has agreed to construct an electric power plant and to deposit sufficient money in a perpetual trust fund to pay a $10,000/year operating cost and to perform a major renovation to the plant every 15 years at a cost of $200,000. The plant itself will initially cost $500,000 to construct. If the trust fund earns 10% interest per year (compounded annually), what is his capitalized cost to construct the plant, to make the future periodic renovations, and to pay the annual operating costs forever?
Homework Equations
The Attempt at a Solution
A = $10,000 /year.
Renovation cost every 15 years = $200,000
Initial cost = $500,000. Interest rate = 10%
Capitalized cost, P0 = 500,000 + (100,000/0.10) + {200,000 (A/P, 10%, 15)/0.10} = 500,000 + 1,000,000 + {200,000(0.1315)/0.10} = $1,763,000
I think I see two mistakes here: (100,000/0.10) should be (10,000/0.10), right?
And 200,000 (A/P, 10%, 15) should be 200,000 (A/F, 10%, 15) too?