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-1 is $80,000, would you scrap the plant at the end of year-1?

Question

Quizplus · Accepted Answer

The net cash flow if the plant is scrapped at the end of year-1 is $43,300 (cash flow) + $80,000 (salvage value) = $123,300. If the plant is not scrapped, the total cash flow over three years is $43,300 + $43,300 + $58,300 = $144,900. However, the present value of future cash flows should be considered. Assuming a discount rate, if the present value of future cash flows is less than $123,300, scrapping is better. Without a discount rate, scrapping seems more beneficial.

The Manufacture of Folic Acid Is a Competitive Business