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

Vihaan Engineering buys a machine for Rs 10,00,000 for a project and needs additional working capital of Rs 1,50,000 at the start, which will be fully recovered at the end of year 4, the end of the project life. The machine will be sold for Rs 1,00,000 at the end of year 4 (ignore tax). What is the initial outlay and the terminal cash inflow (excluding operating cash flows)?

The initial outlay is Rs 11,50,000, being machine cost plus working capital, and the terminal inflow is Rs 2,50,000, being salvage of Rs 1,00,000 plus recovery of Rs 1,50,000 working capital at the end of the project.

  1. AInitial outlay Rs 10,00,000; terminal inflow Rs 2,50,000
  2. BInitial outlay Rs 11,50,000; terminal inflow Rs 1,00,000
  3. CInitial outlay Rs 11,50,000; terminal inflow Rs 2,50,000Correct
  4. DInitial outlay Rs 8,50,000; terminal inflow Rs 2,50,000

Explanation

Initial outlay = 10,00,000 + 1,50,000 working capital = 11,50,000. Terminal inflow = salvage 1,00,000 + working capital recovery 1,50,000 = 2,50,000. Option B omits the working capital recovery; option A omits the working capital at the start.

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