Question
You are the manager of a large crude-oil refinery. As part of the refining process, a certain heat exchanger (operated at high temperatures and
You are the manager of a large crude-oil refinery. As part of the refining process, a certain heat exchanger (operated at high temperatures and with abrasive material flowing through it) must be replaced every year. The replacement and downtime cost in the first year is $175,000. This cost is expected to increase due to inflation at a rate of 7% per year for five years (i.e. until the EOY 6), at which time this particular heat exchanger will no longer be needed. If the company's cost of capital is 20% per year, how much could you afford to spend for a higher quality heat exchanger so that these annual replacement and downtime costs could be eliminated? Click the icon to view the interest and annuity table for discrete compounding when = 7 % per year. Click the icon to view the interest and annuity table for discrete compounding when i = 20% per year. You could afford to spend $ thousands for a higher quality heat exchanger. (Round to one decimal place.)
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