How much afford to spend for higher quality heat exchanger

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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 8% per year for five years, 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?

Reference no: EM131505762

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