As part of the crude-oil refining process in a large crude-oil refinery, a certain heat exchanger must be replaced every year. The replacement and downtime cost in the first year is $801,000 . This cost is expected to increase due to inflation at a rate of 2% per year for the following five years, at which time this particular heat exchanger will no longer be needed. Assume the company's cost of capital is 4% per year. (a) If a higher quality heat exchanger can eliminate these annual replacement and downtime costs, what is the maximum price you can consider? Round off your final answer to nearest thousand. (b) In case this higher quality heat exchanger requires an extra annual maintenance cost $1000 at EOY 1 and is expected to increase $200 for the following five years, what is the maximum price you can consider? Round off your final answer to nearest thousand.

As part of the crude-oil refining process in a large crude-oil refinery, a certain heat exchanger must be replaced every year. The replacement and downtime cost in the first year is $801,000 . This cost is expected to increase due to inflation at a rate of 2% per year for the following five years, at which time this particular heat exchanger will no longer be needed. Assume the company's cost of capital is 4% per year. (a) If a higher quality heat exchanger can eliminate these annual replacement and downtime costs, what is the maximum price you can consider? Round off your final answer to nearest thousand. (b) In case this higher quality heat exchanger requires an extra annual maintenance cost $1000 at EOY 1 and is expected to increase $200 for the following five years, what is the maximum price you can consider? Round off your final answer to nearest thousand.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...

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