Capitalized cost

One of the most important applications of perpetuity in in capitalized cost. The capitalized cost of any
propert is the sum of the first cost and the present worth of all costs of replacement, operation and
maintenance for a long time or forever.
Equals the first cost plus cost of perpetual maintenance.
Case 1. No replacement, only maintenace and or operation every period.
Capitalized cost = First cost + Present worth of perpetual operation and or maintenace.
Case 2. Replacement only, no maintenance and or operation.
Capitalized cost = First cost + Present worth of perpetual replacement
Let
S
=
amount needed to replace a property every k periods.
X
=
amount of principal invested at rate i% the interest on which will amount to S every k
periods.
Xi
=
interest on X every period, the periodic deposit towards the accumulation of S
S Xi ( F / A, i %, k )

S
1
S
i

i F / A, i %, k
i (1 i ) 1
S
X
(1 i ) k 1

Capitalized cost
One of the most important applications of perpetuity in in capitalized cost. The capitalized cost of any
propert is the sum of the first cost and the present worth of all costs of replacement, operation and
maintenance for a long time or forever.
Case 1. No replacement, only maintenace and or operation every period.
Capitalized cost = First cost + Present worth of perpetual operation and or maintenace.
Case 2. Replacement only, no maintenance and or operation.
Capitalized cost = First cost + Present worth of perpetual replacement
Let
S
=
amount needed to replace a property every k periods.
X
=
amount of principal invested at rate i% the interest on which will amount to S every
k periods.
Xi
=
interest on X every period, the periodic deposit towards the accumulation of S
S Xi ( F / A, i %, k )

S
1
S
i

i F / A, i %, k
i (1 i ) 1

S
(1 i ) k 1

of any structure or property is the sum of the annual depreciation cost, interest of the first
cost and the annual operating charge and maintenance costs, or
Annual Cost = annual depreciation charge + interest of the first cost + annual O
and M.
Examples:
1.
To maintain a bridge , $5000 ill be required at the end of 3 years and annually
thereafter. If money is worth 8%, determine the capitalized of all future maintenance.
A. $53,584
B. $55,384 C. $62500 D. $65,548
2.
A plant installed a new mixer at a total cost of $150,000 and is estimated to have a
useful life of 10 years. It is estimated to have a scrap value of $5,000 at the end of useful
life. If interest is 12% compounded annually, determine its capitalized cost.
A.$228,680
B. $218,860 C. $238,480 D. $145,580
3.
Compare the capitalized costs of the 2 projects:
A pavement of asphalt costing $100,000 which would last for 5 years with minor repairs. At
the end of 5 years, $5,000 would be spent for removal of old surface before $100,000 is
spent again for a new surface.
A pavement of concrete costing $250,000 which would last indefinitely, with cost of $20,000
for minor repairs at the end of every 3 years. Money is worth 8% compounded annually?
4.
A trust fund is to be set fund for a testing laboratory. $2M is needed for the acquisition
of building and lot. Annual operating costs amounts to $400,000 each year and $500,000 is
needed for the purchased of new equipment and replacement of equipment every 5 years
beginning 5 years from now.
If money is worth 10%, how much should be paid into the fund for the perpetual operation
and replacement of the laboratory.
A.$5.82M
B. $6.82M C. $7.82M D. $8.82M
5. Compare the Capitalized cost for the perpetual operation and maintenance of the
following box culverts
Timber
Steel
First Cost
$50,000
$80,000
Estimated Life
10 years
30 years
Scrap Value
$2,000
$5,000
Annual Maintenance
$1,200
$2,000
If money is worth 8%, which is recommended?
6.

Based on the data below, recommend which bridge must be financed for a project.
Bridge A
Bridge B
Initial Cost
$200,000
$240,000
Cost of Renewal
$200,000
$240,000
Salvage Value
0
$20,000
Annual Maintenance
$1,000
None
Repairs every 5 years
$10,000
$5,000
Estimated Life
30 years
40 years

Bonds are a financial security note issued by businesses or corporation and by the government as a means
of borrowing long term fund. It may also be defined as a long term note issued bythe lender by the
borrower stipulating the terms of repayment and other conditions.
Bond do not represent ownership of a business or corporation and therefore not entitled to share of the
profits. The bondholder has no voice in the affair of the business. However the bondholder has a more
stable and secured investment than does holder of common or preferred stock of the business or
corporation.
Bonds are issued in certain amounts known as the face value or par value of the bond. When the face value
has been repaid, normally at maturity, the bond is said to be redeemed or retired. Bond rate is the interest
rate quoted in the bond.
Life cycle of a Bond
1. Borrower sold bond to lender
2. Lender gets certificate from borrower
3. Lender receives periodic interest
4. Borrower redeems bond after n years, pays principal and gets back certificate
Value of a Bond is the present worth of all the amounts the bond holder will receive through his possession of the
bond. The two payments that the bondholder will receive are the following:
a. Periodic payments as interest of the bond until it is redeemed.
b. Single payment upon maturity of bond. This payment is usually equal to the par value of the bond.
Formula for the value of the Bond:

Zr[(1 i ) n 1]
C
Vn

n
i (1 i )
(1 i ) n
Where:
Z = par value of the bond
C = redemption price of the bond
r = rate of interest of bond per period
i = interest rate per period
n = number of years before before redemption
Example:
1. A P1M issue of 3%, 15 year bond was sold at 95%. What is the rate of interest of this investment?
A. 3%
B. 3.4%
C. 3.7%
D. 4%
2. A P1,000, 6% bond pays dividend semiannually and will be redeemed at 110% on June 21, 2012. It is bought
on June 21, 2009 to yield 4% interest. Find the price of the bond.
A. P1,122.70
B.P1,144.81
C. P1,133.78
D. P1,115.53
3. A man wants to make 14% nominal interest compounded semi-annually on a bond investment. How much
should the man be willing to pay now for 12%. P10,000 bond that will mature in 10 years and pay interest
semi-annually?
A. P6,000
B. P8,250
C. P8,950
D. P8,250
4. A P1,500 bond which will mature in 10 years and with a bond rate of 15% payable annually is to be
redeemed at par at the end of this period. If it is sold now for P1,390, determine the yield at this price.
A. 16.56%
B.14.57%
C. 15.68%
D. 17.65%

Sample Multiple choice for Bonds and Business Organization:

1. TRUE What is defined as a financial security note that is issued for businesses or corporations and by the
government as a means of borrowing long term fund?
A. T-Bills
B. Securities C. Bond
D. Bank Notes
2. FALSE What refers to the present worth of all the amounts the bondholder will receive through his
possesion of the bond?
A.par value of the bond
B. Face value of the bond
C. Redeemed value of the bond
D. Value of the bond
3. What refers to a document that shows proof of legal ownership of a financial security?
A. Bond
B. Bank note C. Coupon
D. Check
4. What type of bond is issued jointly by two or more corporations?
A. Mortgage bond
B. Joint bond C. Tie-up bond D. Trust bond
5. TRUE What type of bond whose guarranty is in line on railroad equipment, such as freight and passenger
cars, locomotives, etc?
A.railroad bond
B. Equipment obligation bond C. Equipment bond
D. Equipment trust bond
6. TRUE A type of bond to which are attached coupons indicating the interest due and the date when such
interest is to be paid is called ___?
A. Registered bond
B. Coupon bond
C. Mortgage bond
D. Collateral trust bond
7. TRUE What bond whose security is a mortgage on certain specified assets of the corporation?
A. Registered bond
B. Collateral trust bond
C. Mortgage bond
D. Debenture bond
8. FALSEA bond without any security behind them except a promise to pay by the issuing corporation is called
___?
A. Joint bond B. Debenture bond
C. Trust bond D. Common bond
9. FALSEA type of bond where the corporation pledges securities which it owns such as the stock or bonds of
one of its subsidiaries?
A. Mortgage bond
B. Joint bond C. Security bond
D. Collateral trust bond
10. FALSE What type of bond where the corporations owners name are recorded and the interest is paid
periodically to the owners with their asking for it?
A. Preferred bond
B. Registered bond
C. Incorporators bond D. Callable bond
11. FALSE What type of bond which can be redeemed before maturity date?
A. Preferred bond
B. Registered bond
C. Incorporators bond D. Callable bond
12. What is the feature of some bonds whereby the issuer can redeem it before it matures?
A. Return clause
B. callability C. Recall clause
D. Call clause
13. The price at which the callable bond will be redeemed from the bond holder is called ____?
A. Par value B. Call value C. Face value D. Redemption value
14. A form of business organization in hich a person conducts his business alone and entirely for his own profit,
being solely responsible for all its activities and liabilities.
A. Sole proprietorship B. entrepreneurship
C. partnership D. Corporation

15. Is an artificial being created by operation of la, having the right of succession and the process, attributes and
properties expressly authorized by the la or incident to its existence.
A. Corporation
B. property
C. partnership
D. Organization
16. What is the simplest form of business organization?
A. Sole proprietor ship
B. partnership C. enterprise

D. Corporation

17. Double taxation is a disadvantage of which business organization?

A. Sole proprietor ship
B. partnership C. Corporation D. Enterprise
18. In case of bankruptcy of a partnership,
A. The partners are not liable for the liabilities of the partnership
B. The partnership assetsonly ill be used to pay the liabilities
C. The partners personal assets are attached to the debt of the partnership
D. The partners may sell stock to generate additional capital
19. Which is true about partnership?
A. It has perpetual life
B. It will be dissolved if one of the partners ceases to be connected with the partnership
C. It can be handed down from one generation of partners to another
D. Its capitalization must be equal for each partner
20. which is true about corporation?
A. it is the worse type of business organization
B. the minimum number of incorporators to start a corporation is three
C. its life is dependent on the lives of the incorporators
D. the stockholders of the corporation are only laible to the extent of their investments
21. An aggregation of individuals formed for the purpose of conducting a business and recognized by law as a
fictitious person is aclled ____.
A. partnership
B. investors
C. corporation D. Stockholders
22. An association of two or more persons for the purpose of engaging into a business for profit is called ____.
A. entrepreneurship B. partnership C. proprietorship
D. Corporation
23. what represents the ownership of stockholders who have a residual claim on the assets of the corporation
after all other claims have been settled?
A. Authorized capital stock
B. Preferred stock
C. Incorporators stock D. Presidential stock
24. What stock represents ownership and enjoys certain preferences than ordinary stock?
A. Authorized capital stock
B. Preferred stock
C. Incorporators stock D. Presidential stock
25. The amount of companys profit that the board of directors of the corporation decides to distribute to
ordinary shareholders is called _____.
A. dividend B. return
C. Share of stock
D. Equity
26. What refers to the residual value of a companys assets after all outside liabilities have been allowed for?
A. dividend B. equity
C. return
D. Par value
27. what refers to the claim of anyone to ownership?
A. proprietorship
B. assets
C. equity

D. Liability

28. Cash money and credit necessary to establish and operate an enterprise are generally called ____.

A. capital

B. funds

C. assets

D. Liabilities

1. Cost of things that are neither labor nor material.

A. Investment

B. Labor Cost

C. Expenses D. Construction Cost

2. An aggregation of individuals formed for the purpose of conducting a business and

recognized by law as a fictitious person is called?
A. Partnership
B. Investors C. Corporation
D. Stockholders
3. What is a borrower of a particular loan almost always required to do during repayments?
A. Pay exactly the same amount of principal each year
B. Pay a different rate of interest after each payment
C. Pay exactly the same amount of interest each payment
D. Repay the loan over an agreed upon length of time
4. What is a work-in-process classified as?
A. an asset B. a revenue C. owners equity

D. an expense

5.
5. An association of two or more persons for the purpose of engaging into a business for profit is called ____.
A. entrepreneurship
B. partnership C. proprietorship
D. Corporation
6. Bonds which have no security behind them other than the assets of a corporation issuing
them are known as
A. mortgage bonds
B. amortization bonds
C. trust bonds
D. debenture
bonds
7. Estimated value at the end of the useful life.
A. Scrap Value
B. Balance C. Economic Life

D. Salvage value

8. The amount of companys profit that the board of directors of the corporation decides to distribute to ordinary
shareholders is called _____.
A. dividend
B. return
C. Share of stock
D. Equity
9. The minimum the of incorporators in a corporation is _____.
A. 3 B. 4 C.5
D.6
9. Is the process of determining the value or worth of physical property for specific reasons.
a. Depletion b.. Valuation d. Economy D. Investments
10.
A.
B.
C.
D.

which is true about corporation?

it is the worse type of business organization
the minimum number of incorporators to start a corporation is three
its life is dependent on the lives of the incorporators
the stockholders of the corporation are only liable to the extent of their investments

B.
A.
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