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 discount rate is 20 percent, what is the value of the plant at the end of year 1?
A)+$76,569
B)-$23,400
C)$48,600
D)None of the options are correct.

Question

Quizplus · Accepted Answer

The value of the plant at the end of year 1 is the present value of the cash flows for years 2 and 3, discounted at 20%. The calculation is: $43,300 / (1.2) + $58,300 / (1.2^2) = $36,083.33 + $40,485.42 = $76,568.75, which rounds to $76,569.

The Manufacture of Folic Acid Is a Competitive Business