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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

Company P is considering selling a loss-making subsidiary. Its book value in P's accounts is ₹80 crore. The subsidiary is expected to generate present value of future cash flows of ₹60 crore if retained. A buyer offers ₹70 crore cash. Ignoring tax and costs, which statement is correct?

Sell the subsidiary. The cash offer of ₹70 crore is ₹10 crore above the ₹60 crore present value of its future cash flows if retained, so shareholder value rises. The book value of ₹80 crore is irrelevant to the decision.

  1. ASell, because the offer exceeds the value in use by ₹10 croreCorrect
  2. BRetain, because the book value exceeds the offer
  3. CRetain, because selling would create an accounting loss of ₹10 crore
  4. DSell, because the offer exceeds the book value
  5. Retain, because value in use is less than book value

Explanation

The decision depends on value to shareholders, not book value. Selling gives ₹70 crore against ₹60 crore from keeping, so value rises by ₹10 crore. The accounting loss of ₹10 crore (80-70) is a sunk cost effect and should not drive the choice.

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