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Business, 22.06.2019 21:10 stephany94

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 ​$165 comma 000. this cost is expected to increase due to inflation at a rate of 7​% 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 15​% 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?

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Answer from: kenz309

The company could pay up to 866,965.89 dollars today to solve the current heat exchanger situation

Explanation:

We have to determinate the present value of 7 year annuity which increase at a rate of 7% when the cost of capital is 15% being the first quota 175,000 dollars

\frac{1-(1+g)^{n}\times (1+r)^{-n} }{r - g}  

grow rate0.07  

required return0.15

Cuota175,000

n7

PV =  866,965.89  

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