CMA Final · Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities
Rohit Steels has a 6-year-old plant with original cost ₹60 lakh, original life 10 years. Current replacement cost of a new identical plant is ₹90 lakh. Using replacement cost with depreciation proportional to age and a straight-line pattern with nil residual value, and also deducting ₹2 lakh for functional obsolescence, what is the plant's value?
Depreciated replacement cost is the replacement cost of ₹90 lakh times remaining life of 4/10, giving ₹36 lakh. Deducting ₹2 lakh for functional obsolescence gives a plant value of ₹34 lakh.
- A₹36 lakh
- B₹34 lakhCorrect
- C₹52 lakh
- D₹54 lakh
Explanation
Remaining life fraction = 4/10. Depreciated replacement cost = 90 x 0.4 = ₹36 lakh. Less functional obsolescence ₹2 lakh = ₹34 lakh. Using ₹36 lakh ignores obsolescence; using original cost of 60 is the wrong base.
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