Calculation of PW0

Author: E.E. Kimberly

The yearly operating cost of a motor includes interest, taxes, insurance, repair cost, and energy cost. This total operating cost per year divided by the interest rate gives the capital investment necessary to yield an amount of money equal to the annual operating cost every year forever. The annual cost of operation is then said to be capitalized. This capitalized amount is the item PW₀.

Let C₀= the annual cost of operation; r = the interest rate; m = number of machines to be bought consecutively.

An amount invested now would yield an operating fund forever, whereas a need is usually anticipated for an estimated term of years only. Therefore, for the years after the termination of the anticipated need at the end of n years, there should be no investment made now to provide for operating funds. The present worth of this unnecessary sum is

C

and this amount must be subtracted from - to obtain PW_0p, the partial present worth corresponding to the years of anticipated need. Thus,

[23-2]

Therefore, PW₀ is capital set aside for the operation of the motor throughout its life and the lives of its intended successors.