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 no taxes.)If the salvage value at the end of year 2 is $60,000,should you scrap the plant at the end of year 2?

Question

Quizplus · Accepted Answer

The total cash flow if scrapped at the end of year 2 is $43,300 (year 1) + $43,300 (year 2) + $60,000 (salvage value) = $146,600. If not scrapped, the total cash flow is $43,300 (year 1) + $43,300 (year 2) + $58,300 (year 3) = $144,900. Scrapping at the end of year 2 yields a higher total cash flow.

The Manufacture of Folic Acid Is a Competitive Business