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 ​$160,000. This cost is expected to increase due to inflation at a rate of 6​% per year for six years​ (i.e. until the EOY 7​), 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 costs could be​ eliminated?

Answer 1