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 is $66,700, would you scrap the plant at the end of year one?

Question

Quizplus · Accepted Answer

Based on the information given, we need to calculate the net present value (NPV) of the plant to make a decision. However, since there is no discount rate provided, we cannot calculate the NPV. Therefore, we need to compare the salvage value of $66,700 with the cash flow of the first year, which is $43,300. Since the salvage value is greater than the cash flow of the first year, it would not be wise to scrap the plant at the end of year one. Therefore, the best choice is B) No.

The Manufacture of Folic Acid Is a Competitive Business