A small manufacturer uses an industrial boiler in its production process. A new boiler can be purchased for $10,000. As the boiler gets older, its maintenance expenses increase while its resale value declines. Since the boiler will be exposed to heavy use, the probability of a breakdown increases every year. Assume that when a boiler breaks down, it can be used through the end of the year, after which it must be replaced with a new one. Also, assume that a broken-down boiler has no resale value.
Some basic data are given in the following table:
a. At what year of operation should the boiler be replaced?
b. What is the expected cost per year for the boiler, under the optimal replacement strategy?

 

Transcribed Image Text:

Year of Operation Resale Breakdown Expenses Value Probability 1 1,500 7,000 0.1 2,000 5,000 0.2 3,000 4,000 0.4 4,500 2,000 0.5 6,000 500 0.8 2345 Year of Operation Resale Breakdown Expenses Value Probability 1 1,500 7,000 0.1 2,000 5,000 0.2 3,000 4,000 0.4 4,500 2,000 0.5 6,000 500 0.8 2345

Answer rating: 100% (QA)

Please ... View the full answer