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 are as follows:

Year	0	1	2	3
1.Initial Investment	120
2.Revenues		110	110	110
3. Cash Operating Costs		50	50	50
4. Tax Depreciation		40	40	40
5. Income Pretax		20	20	20
6. Tax at 40%		8	8	8
7. Net Income		12	12	12
8. After tax salvage				18
9. Cash Flow	120	52	52	70
NPV at 20%	$0.00

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.
• Pre-tax 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.

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