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 1?

Question

Quizplus · Accepted Answer

Since the cash flow from the plant is positive for all three years and the salvage value at the end of year 3 is higher than the initial cost of the plant, it would not be advisable to scrap the plant at the end of year 1. The net present value has not been calculated, but it is not necessary to make the decision of whether to scrap the plant after year 1 or not. Therefore, the answer should be B.

The Manufacture of Folic Acid Is a Competitive Business