CAPITAL
RECOVERY

CAPITAL RECOVERY
• Capital cost of an asset is the sum of the
first cost and present worth of all future
payments and replacements which are
assumed to continue for a long time.

Problem 1
Determine the capitalized cost of an equipment
costing P2M with and annual maintenance of
P200,000.00 if money is worth 20% per annum.

Problem 2
How large a contribution is required to endow perpetually a
research laboratory which requires P500,000 for original
construction, P200,000 per year for operating expenses, and
P100,000 every three years for new and replacement
equipment? Interest is 4%.

Problem 3 (CE NOV 1996)
At 6%, find the capitalized cost of a bridge whose
cost is P200 M and life is 20 years, if the bridge
must be partially rebuilt at a cost of P100M at the
end of each 20 years.

Problem 4
The average annual cost of damages caused by floods to a
certain subdivision located along Pasig River is estimated at
P5M. To build a gravity dam to protect the area from floods
would cost 25M and would involve an annual maintenance cost
of P2M. Interest rate is 11%.
What is the present worth of all the damages for 15 years?
What is the capitalized cost of the dam?
How many years will it take for the dam to pay for itself?

BOND

BOND
• A written contract to pay a certain
redemption value (c.) on a specified
redemption date and to pay equal dividend
(d) periodically.

Problem 1
A P100,000, 6% bond, pays dividend semi-
annually and will be redeemed at 110% on July 1,
1999. Find its price if bought on July 1, 1996, to
yield an investor 4%, compounded semi-
annually.

Problem 2
A community wishes to purchase an existing
utility valued at P500,000 by selling 5% bonds
that will mature in 30 years. The money to retire
the bond will be raised by paying equal annual
amounts into a sinking fund that will earn 4%.
What will be the total annual cost of the bonds
until they mature?

Problem 3
A company issued 50 bonds of P1,000.00 face
value each, redeemable at par at the ends of 15
years to accumulate the funds required for
redemption, the firm established a sinking fund
consisting of annual deposits, the interest rate of
the fund being 4%. What was the principal in the
fund at the end of the 12th year?

BREAK-EVEN
ANALYSIS

BREAK-EVEN ANALYSIS
• Break even analysis is concerned with finding the
point at which revenues and costs are exactly
equal. This point is known as BREAK-EVEN-
POINT.

Problem 1
A Company that manufactures electric motors
has a production capacity of 200 motors a month.
The variable costs are P150.00 per motor. The
average selling price of the motors is P275.00.
Fixed costs of the company amount to
P20,000.00 per month which includes taxes. The
number of motors that must be sold each month
to break even is closest to.

Problem 2
XYZ Corporation manufacturers bookcases that it
sells for P65.00 each. It costs XYZ P35,000.00 per
year to operate its plant. This sum includes rent,
depreciation charges on equipment, and salary
payments. If the cost to produce one bookcase is
P50.00, how many cases must be sold each year
for XYZ to avoid taking a loss?

Problem 3
Determine the break-even point in terms of number of
units produced per month using the following data:
(the costs are in pesos per unit)
Selling price per unit…..600 pesos
Total Monthly overhead expenses…..428,000 pesos
Labor Cost.….. 115 pesos
Cost of Materials…… 76 pesos
Other Variable Cost…….2.32 pesos