CMA Final · Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities
Kaveri Textiles has a machine whose replacement cost new is Rs 50,00,000. Its total expected life is 10 years, and 4 years have elapsed. Straight-line physical deterioration applies with no salvage value. Functional obsolescence due to excess operating cost is estimated at Rs 3,00,000 in total. What is the depreciated replacement cost?
The depreciated replacement cost is Rs 27,00,000. Physical deterioration of 4/10 of Rs 50,00,000 is Rs 20,00,000, leaving Rs 30,00,000. Deducting Rs 3,00,000 of functional obsolescence gives the final value.
- ARs 27,00,000Correct
- BRs 30,00,000
- CRs 33,00,000
- DRs 25,00,000
Explanation
Physical deterioration = 50,00,000 x 4/10 = 20,00,000. Value after deterioration = 30,00,000. Deduct functional obsolescence 3,00,000 to get 27,00,000. Rs 30,00,000 ignores obsolescence; Rs 33,00,000 wrongly adds it.
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