CMA Intermediate · Financial Management and Business Data Analytics · Capital Budgeting
Mehta Plastics is evaluating a new moulding line. The company already spent Rs 2,00,000 last year on a feasibility study. The machine costs Rs 10,00,000, and installation needs a further Rs 50,000. Which amount should be treated as the initial cash outflow at time zero?
The initial outflow is Rs 10,50,000, being the machine cost plus installation. The Rs 2,00,000 feasibility study was spent last year and is a sunk cost, so it does not change with the decision and must be excluded from incremental cash flows.
- ARs 12,50,000
- BRs 10,50,000Correct
- CRs 10,00,000
- DRs 12,00,000
Explanation
The feasibility study cost is sunk and irrelevant. Initial outflow = machine cost 10,00,000 + installation 50,000 = Rs 10,50,000. Including the sunk study cost would give 12,50,000, which is wrong because that money is already spent whatever the decision.
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