Question: A heat exchanger is being installed as part of a plant modernization program. It costs $80,000, including installation, and is expected to reduce the overall plant fuel cost by $20,000 per year. Estimates of the useful life of the heat exchanger range from an optimistic 12 years to a pessimistic 4 years. The most likely value is 5 years. Assume the heat exchanger has no salvage value at the end of its useful life.
(a) Determine the pessimistic, most likely, and optimistic rates of return.
(b ) Use the range of estimates to compute the mean life and determine the estimated before-tax rate of return.