You are the manager of a large crude-oil refinery. As part of the refining proce

Question

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 f the company's cost of capital s 18% per year, how much could you afford to spend for a higher quality heat exchanger so that these annual replacement and downtime costs could be eliminated? Click the icon to view the interest and annuity table for discrete compounding when i-18% per year. You could afford to spend S thousands for a higher quality heat exchanger. (Round to one decimal place.)

Explanation / Answer

=175000/1.18+175000*1.07/1.18^2+175000*1.07^2/1.18^3+175000*1.07^3/1.18^4+175000*1.07^4/1.18^5+175000*1.07^5/1.18^6

=706494.323

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