Your city has asked you to determine the capitalization necessary to build and maintain a new sewage treatment plant, which has a 20 year life span. The plant will cost $20 million to build, and will require $1.5M every 10 years for equipment replacement (no replacement at EOY 30). A major renovation costing $3.5 million is expected to occur at EOY 20. Annual O&M costs are estimated to be $325,000.
A) What is the level of capitalization necessary for the project if the discount rate is 3%?
B) Suppose you wanted to pay for this capitalization with a bond, which means you would pay for an annual annuity to pay for the initial capital cost as well as the life cycle costs. What would this annual annuity be if the interest rate is 6%?