Problem
For the data in Problem 10-3, assume that the optimistic probability is 15%, the most likely is 80%, and the pessimistic is 5%.
(a) What is the expected value of the rate of return?
(b) Compute the expected value for the life, and the corresponding rate of return.
(c) Do the answers to (a) and (b) match? Why or why not?
Problem 10-3
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.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.