The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The cash flow from the plant is as follows: year 1: +$43,300; year 2: +$43,300; and year 3: +$58,300. (Assume there is no tax.)If the salvage value of the plant at the end of year is $66,700, would you scrap the plant at the end of year 1?
A)Yes
B)No
C)It depends on the net present value.
D)More information is needed.

Question

Quizplus · Accepted Answer

Since the salvage value at the end of year 3 is higher than the cost of a new plant, it is financially optimal to use the plant for all three years. Therefore, it would not be wise to scrap the plant at the end of year 1.

The Manufacture of Folic Acid Is a Competitive Business