Question
A new grain combine with a 20 year life can remove seven pounds of rocks from its harvest per hour. Any rocks left in the
A new grain combine with a 20 year life can remove seven pounds of rocks from its harvest per hour. Any rocks left in the its output hopper will cause $35,000 damage in subsequent processes. Several investments are available to increase the rock-removal capacity, as listed in the table below. If the effective annual rate of return is 8%, what should be done? Note that the $35,000 damage is on an annual basis. For example, if nothing is done (1st option), then there is a 20% chance of incurring $35,000 of damage each year.
Rock Removal Rate (RRR) | Probability of exceeding RRR | Required Investment |
7 lb/hr | 0.20 | $0 |
8 lb/hr | 0.10 | $12,000 |
9 lb/hr | 0.05 | $18,000 |
10 lb/hr | 0.025 | $25,000 |
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