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 discount rate is 20%, what is the value of the plant at the end of year-1?

Question

Quizplus · Accepted Answer

The value of the plant at the end of year-1 is the present value of the remaining cash flows from year-2 and year-3, discounted at 20%. The calculation is: PV = 43,300 / (1.2) + 58,300 / (1.2^2) = $76,569.

The Manufacture of Folic Acid Is a Competitive Business