As part of the refining process, a certain heat exchanger must be replaced every year.  The replacement and downtime cost in the first year is $200,000.  This cost is expected to increase at a rate of 8% per year for 5 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 can it afford to spend for a higher quality heat exchanger so that these annual replacement costs could be eliminated?

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Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.