A heat exchanger is being installed as part of a plant modernization program. It costs $80,000, including

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 12years to a pessimistic 4 years the most likely value is 5 years. Using the range of estimates to compute the mean life, determine the estimated before-tax rate of return. Assume the heat exchanger has no salvage value at the end of its useful life.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...