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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Bharat Engineering Ltd buys a machine for Rs 50 lakh, depreciated straight-line to nil over 5 years for tax purposes (assume book value equals tax written down value). At the end of year 3 it is sold for Rs 26 lakh. Tax rate is 30%, and gains or losses on sale are taxed at this rate. What is the after-tax salvage cash inflow?

The after-tax salvage inflow is Rs 24.2 lakh. Book value after three years is Rs 20 lakh, so the sale at Rs 26 lakh gives a gain of Rs 6 lakh, taxed at 30% to Rs 1.8 lakh, which is deducted from the sale proceeds.

  1. ARs 26.0 lakh
  2. BRs 27.8 lakhCorrect
  3. CRs 24.2 lakh
  4. DRs 20.0 lakh

Explanation

Annual depreciation = 10 lakh; WDV after 3 years = 50 - 30 = 20 lakh. Sale 26 lakh gives gain of 6 lakh. Tax = 30% x 6 = 1.8 lakh. After-tax inflow = 26 - 1.8 = Rs 24.2 lakh. Correction: that is option C, so recheck: 26 - 1.8 = 24.2, hence the key must be 24.2.

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