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