As part of the refining process, a certain heat exchanger must be replaced every year. The replacement and downtime cost in the first year is $200,000. This cost is expected to increase at a rate of 8% per year for 5 years, at which time this particular heat exchanger will no longer be needed. If the company’s cost of capital is 18% per year, how much can it afford to spend for a higher quality heat exchanger so that these annual replacement costs could be eliminated?
As part of the refining process, a certain heat exchanger must be replaced every year. The replacement and downtime cost in the first year is $200,000. This cost is expected to increase at a rate of 8% per year for 5 years, at which time this particular heat exchanger will no longer be needed. If the company’s cost of capital is 18% per year, how much can it afford to spend for a higher quality heat exchanger so that these annual replacement costs could be eliminated?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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As part of the refining process, a certain heat exchanger must be replaced every year. The replacement and downtime cost in the first year is $200,000. This cost is expected to increase at a rate of 8% per year for 5 years, at which time this particular heat exchanger will no longer be needed. If the company’s cost of capital is 18% per year, how much can it afford to spend for a higher quality heat exchanger so that these annual replacement costs could be eliminated?
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