A new grain combine with a 20 year life can remove seven pounds of rocks...
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A new grain combine with a 20 year life can remove seven pounds of rocks from its harvest per hour. Any rocks left in the its output hopper will cause $35,000 damage in subsequent processes. Several investments are available to increase the rock-removal capacity, as listed in the table below. If the effective annual rate of return is 8%, what should be done? Note that the $35,000 damage is on an annual basis. For example, if nothing is done (1st option), then there is a 20% chance of incurring $35,000 of damage each year.
Rock Removal Rate (RRR)
Probability of exceeding RRR
Required Investment
7 lb/hr
0.20
$0
8 lb/hr
0.10
$12,000
9 lb/hr
0.05
$18,000
10 lb/hr
0.025
$25,000
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