CS Executive · Corporate Accounting and Financial Management · Capital Budgeting
Sharma Textiles Ltd is evaluating a machine costing ₹10,00,000. The company already spent ₹50,000 on a feasibility study last year (non-refundable). Installation will cost ₹1,00,000 extra. Old machine to be replaced will be sold for ₹2,00,000 now. Ignoring tax, what is the relevant initial cash outflow for the decision?
The relevant initial outflow is ₹9,00,000. It equals the machine cost of ₹10,00,000 plus installation of ₹1,00,000, less ₹2,00,000 from selling the old machine. The ₹50,000 feasibility study is a sunk cost and must be excluded from the decision.
- A₹8,50,000
- B₹9,00,000Correct
- C₹9,50,000
- D₹11,50,000
Explanation
Sunk cost of ₹50,000 is ignored. Outflow = cost 10,00,000 + installation 1,00,000 − sale proceeds of old machine 2,00,000 = ₹9,00,000. Including the feasibility cost would give ₹9,50,000, which wrongly treats a sunk cost as relevant; ignoring sale proceeds gives ₹11,00,000.
Did you get it right without looking?
One question tells you little. A timed set on Capital Budgeting shows your real accuracy, how long you take and where you lose marks.
More Capital Budgeting questions
- Ananya Textiles is evaluating a project with an initial outlay of Rs 2,00,000 that gives a single cash inflow of Rs 2,42,000 at the end of y…
- Mahalaxmi Textiles buys a machine for Rs 12,00,000 that generates uniform annual cash inflows of Rs 3,00,000 after tax. What is the payback …
- Verma Foods plans to replace an old machine with a new one costing Rs 10,00,000. The old machine can be sold for Rs 1,50,000, and its book v…
- In capital budgeting, the certainty-equivalent approach to handling risk works by:
- A project generates additional annual cash revenue of Rs 8,00,000 and cash expenses of Rs 5,00,000, with annual depreciation of Rs 1,00,000.…
- While estimating incremental cash flows for a new project, which of the following should be EXCLUDED from the analysis?