hi Mohammed
to get the answer you should calculate the present value for two option ( shut down now & continue operating )
1 - present value if Logan shut down
Cash outflow cost of labor contract must pay now $ 1500000
cost of default on customer $ 500000
( inability to complete customer contract)
cash inflow Market Value of facility today $ 750000
net cash outflow if shutdown ( loss) = $1250000 (1500000 + 500000 - 750000)
2 - present value of continuing to operate
Revenue 150000 unit * 100$ $ 15000000
variable exp. 150000 unit * 75$ ($ 11250000)
fixed cost
( $ 400000 ) operating income ( loss) ( $ 250000 )
present value of cash outflow if continuing to operate ( $ 901250 ) 250000*3.605
difference between two alternatives = 1250000 - 901250 = $ 348750
so continue to operate will reduce loss with $ 350000
hope this answer can help u
-------------------------------------------
[Hayam] [Helwa]
[Senior Accountant]
[DKT International]
[Cairo]
[Egypt]
-------------------------------------------
Original Message:
Sent: 06-13-2013 02:19 PM
From: Mohammed Mahany
Subject: shut down option
Dear member ,
can any body help about this question ?
-------------------------------------------
Mohammed Mahany
Controller
Cairo
Egypt
-------------------------------------------