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CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control

Bharat Engineering is assessing a project. It spent Rs 1,50,000 last year on a feasibility study. The project needs a new machine costing Rs 10,00,000 and working capital of Rs 2,00,000 to be recovered at the end of the project. Land already owned, with a current market value of Rs 5,00,000 and no other use except sale, will be used. What is the initial cash outflow relevant at time zero?

The relevant initial outflow is Rs 17,00,000: machine Rs 10,00,000, working capital Rs 2,00,000 and the land's opportunity cost of Rs 5,00,000. The Rs 1,50,000 feasibility study is already spent, so it is a sunk cost and is excluded from the decision.

  1. ARs 17,00,000Correct
  2. BRs 15,50,000
  3. CRs 12,00,000
  4. DRs 18,50,000

Explanation

Relevant outflow = machine 10,00,000 + working capital 2,00,000 + opportunity cost of land 5,00,000 = 17,00,000. The feasibility study is a sunk cost and is excluded. Rs 18,50,000 wrongly includes the sunk cost.

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