Chapter 11, Problem 24RQ

When a wine generator is installed there is a substantial initial cost, but daily operation requires no further cash payment. However, to keep the generator in proper operating condition, it must undergo maintenance once a year. Each maintenance cycle requires a cash payment of $5000. The solid lines on the following graph show this situation. The stepped blue line shows the cost over time and the straight brown line shows the revenue derived from the generator.

As the second yearly maintenance approaches, you are informed by the manufacturer that a significant upgrade is available for additional cost. The upgrade will make the generator far more efficient, thus the revenue would increase substantially. The yearly maintenance cost after the upgrade would still be $5000. The dashed lines show the cost and revenue projections if the upgrade s installed.

1. a. What is the amount of revenue per year without the upgrade?
2. b. What is the initial cost of the wind generator?
3. c. How many years after the initial installation do you break even if the upgrade is installed? List your answer as number of years 1 number of months.
4. d. What is the cost of the upgrade completed at the two-year maintenance cycle? Note that this amount includes the standard $5000 maintenance fee.

1. e. How many years after the initial installation would the profit be the same whether you upgrade or not? List your answer as number of years + number of months.
2. f. How many years after the initial installation will you have made a profit of $25,000 if the upgrade is NOT installed? List your answer as number of years + number of months.
3. g. If the upgrade results in increased reliability, thus increasing the maintenance interval to two years, though still at a cost of $5000 per maintenance, how many years after the initial installation v/ill you break even after the upgrade? List your answer as number of years + number of months.