Problem 4-85 (algorithmic) i Question Help * You are the manager of a large crud

Question

Problem 4-85 (algorithmic) i Question Help * You are the manager of a large crude-oil refinery. As part of the refining process, a certain heat exchanger (operated at high temperatures and with abrasive material flowing through it) must be replaced every year. The replacement and downtime cost in the first year is $175,000. This cost is expected to increase due to inflation at a rate of 7% per year for five years (i.e. until the EOY 6), at which time this particular heat exchanger will no longer be needed. the company's cost of capital s 18% per year, how much uld you a d spe for a higher quality he exchangers at these annual replacement and downtime costs could be eliminated? click the icon to view the interest and annuity table for discrete compounding when i-7 % per year. Click the icon to view the interest and annuity table for discrete compounding when i= 18% per year. You could afford to spend s 706494.3 thousands for a higher quality heat exchanger. (Round to one decimal place.)

Explanation / Answer

The amount I can afford to spend is the Present Worth of annual replacement costs over 6 years, computed as follows. Note that

(i) Replacement cost, year N = Replacement cost, year (N - 1) x 1.07

(ii) PV Factor for year N = (1.18)-N

Year Replacement Cost ($) PV Factor @18% Discounted Replacement Cost ($) (A) (B) (A) x (B) 1 175000.00 0.8475 148305.1 2 187250.00 0.7182 134480.0 3 200357.50 0.6086 121943.8 4 214382.53 0.5158 110576.1 5 229389.30 0.4371 100268.2 6 245446.55 0.3704 90921.1 Present Worth ($) = 706494.3

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