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CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control

Sundaram Textiles plans a machine costing Rs 12,00,000. Installation costs Rs 1,00,000 and working capital of Rs 2,00,000 is needed at the start and recovered at the end of the project. Rs 50,000 was already spent last year on a feasibility study. The old machine being replaced is sold for Rs 1,50,000 (no tax effect). What is the relevant initial cash outflow at time zero?

The relevant initial outflow is Rs 13,50,000: machine Rs 12,00,000 plus installation Rs 1,00,000 plus working capital Rs 2,00,000, less Rs 1,50,000 from selling the old machine. The earlier feasibility study cost is sunk and must be excluded from the decision.

  1. ARs 13,50,000Correct
  2. BRs 14,00,000
  3. CRs 15,00,000
  4. DRs 15,50,000

Explanation

Outflow = 12,00,000 + 1,00,000 + 2,00,000 - 1,50,000 = 13,50,000. The feasibility study cost is sunk and ignored. Rs 14,00,000 wrongly includes the sunk cost (13,50,000+50,000).

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