Question: Your firm spends $500,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for

Your firm spends $500,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next three years. If it does so, it expects it will need to spend $2 million in year 4 replacing failed equipment.

a. What is the IRR of the decision to forgo maintenance of the equipment?

b. Does the IRR rule work for this decision?

c. For what costs of capital is forgoing maintenance a good decision?

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