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?
A)Yes
B)No
C)I don't know.
D)More information is needed.

Question

Quizplus · Accepted Answer

The total cash flow if the plant is scrapped at the end of year 2 is $43,300 (year 1) + $43,300 (year 2) + $60,000 (salvage value) = $146,600. If the plant is not scrapped, the total cash flow is $43,300 (year 1) + $43,300 (year 2) + $58,300 (year 3) = $144,900. Since $146,600 is greater than $144,900, it is better to scrap the plant at the end of year 2.

The Manufacture of Folic Acid Is a Competitive Business