Annual replacement and downtime cost could be eliminated

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Reference no: EM13854780

You are the manager of a large crude-oil refinery. 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 $180,000. This cost is expected to increase due to inflation at a rate of 6% 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 18% per year, how much could you afford to spend for a higher quality heat exchanger so that these annual replacement and downtime cost could be eliminated?

(P/F,18%,6)=0.3704

(F/P,6%,6)=1.4185

Reference no: EM13854780

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