CK22 Ltd operates in a competitive business. Demand is steadily expanding, and new plants are constantly being opened. Expected cash flows from an investment in a new plant as follows:

year	0	1	2	3
1. initial investment	120
2. Revenue		110	110	110
3.Cash operating costs	50	50	50
4. Tax depreciation	40	40	40
5. income depreciation	20	20	20
6. Tax at 40%		80	80	80
7. Net income	12	12	12
8.After tax salvage			18
9.cash flow	120	52	52	70
NPV at 20%	0

Suppose that the government now changes tax depreciation to allow a 100% write-off in year 1. Existing plants must continue using the original tax depreciation schedule. Assumptions:

Tax depreciation is straight-line over three years. Pretax salvage value is 30 in year 3 and 60 if the asset is scrapped in year 2. Tax on salvage value is 40% of the difference between salvage value and depreciated investment. The cost of capital is 20% p.a compounded annually.

A. What is the value of existing one-year and two-year old plants? B. Would it make sense to scrap existing plants when they are two rather than three years old?