Answer to Question #65480 in Economics of Enterprise for Dian

Question

The packing in a cooling tower that cools condensing water for a power plant progressively deteriorates and results in gradually rising cost due to reduced plant efficiency. These costs are treated as lump sums at the end of the year, as shown in Fig 3-6. The cost is zero for the first year and then increases $1000 per year until the packing is 16 years old, when replacement is mandatory. At a point 8 years into the life of the packing (just after the $7000 annual cost has been assessed), a decision is to be made on the plan for the next 8 years, i.e., whether to replace the packing or to continue with the existing packing. Money can be borrowed at 9 percent interest, compounded annually. What is the maximum amount that could be paid for the packing in order to justify its replacement? figure 3-6: http://i251.photobucket.com/albums/gg305/dhiezz_zzz/3-6.png?t=1487640332

Answer 1

If at a point 8 years into the life of the packing, a decision is to be made on the plan for the next 8 years, i.e., whether to replace the packing or to continue with the existing packing, then the maximum amount that could be paid for the packing in order to justify its replacement is $44,279.