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A new grain combine with a 20 year life can remove seven pounds of rocks...

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Finance

A new grain combine with a 20 year life can remove seven pounds of rocks from its harvest per hour. Any rocks left in the its output hopper will cause $35,000 damage in subsequent processes. Several investments are available to increase the rock-removal capacity, as listed in the table below. If the effective annual rate of return is 8%, what should be done? Note that the $35,000 damage is on an annual basis. For example, if nothing is done (1st option), then there is a 20% chance of incurring $35,000 of damage each year.

Rock Removal Rate (RRR)

Probability of exceeding RRR

Required Investment

7 lb/hr

0.20

$0

8 lb/hr

0.10

$12,000

9 lb/hr

0.05

$18,000

10 lb/hr

0.025

$25,000

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