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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

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 value is Rs 1,50,000. Installation costs of Rs 50,000 are capitalised into the new machine. Ignoring tax and working capital, what is the initial net cash outflow?

The initial net cash outflow is Rs 9,00,000. The new machine costs Rs 10,00,000 and installation adds Rs 50,000, giving Rs 10,50,000, from which the Rs 1,50,000 received on selling the old machine is deducted. With book value equal to sale price, there is no tax effect.

  1. ARs 10,00,000
  2. BRs 9,00,000Correct
  3. CRs 10,50,000
  4. DRs 8,50,000

Explanation

Outflow = cost 10,00,000 + installation 50,000 - sale proceeds of old machine 1,50,000 = Rs 9,00,000. Rs 10,50,000 ignores the sale proceeds, and Rs 10,00,000 ignores both installation and sale proceeds.

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