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%,what is the value of the plant at the end of year 1?

Question

Quizplus · Accepted Answer

To find the value of the plant at the end of year 1, we need to discount the cash flows from year 2 and year 3 back to year 1.

PV(year 2 cash flow) = $43,300 / (1 + 0.20) = $36,083.33 
PV(year 3 cash flow) = $58,300 / (1 + 0.20)^2 = $36,083.33

Total PV of cash flows at the end of year 1 = $43,300 + $36,083.33 + $36,083.33 = $115,466.67

Therefore, the value of the plant at the end of year 1 is the present value of the future cash flows, which is $115,466.67 minus the initial cost of the plant, which is $100,000.

Value of plant at end of year 1 = $115,466.67 - $100,000 = $15,466.67

Rounding this to the nearest dollar gives us a value of $15,467, which is closest to option A (+$76,569).

The Manufacture of Folic Acid Is a Competitive Business