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

Vindhya Steel is considering replacing an old machine. The old machine has book value Rs 4,00,000 and can be sold for Rs 5,00,000. The new machine costs Rs 15,00,000. Assuming a tax rate of 30% on the gain on sale of the old machine (treated as taxable), and no other items, what is the net initial cash outflow?

The old machine's gain of Rs 1,00,000 attracts tax of Rs 30,000, so net proceeds are Rs 4,70,000. Subtracting this from the new machine's cost of Rs 15,00,000 gives a net initial outflow of Rs 10,30,000.

  1. ARs 10,00,000
  2. BRs 10,30,000Correct
  3. CRs 10,70,000
  4. DRs 11,00,000

Explanation

Gain = 5,00,000 - 4,00,000 = 1,00,000; tax = 30,000. Net sale proceeds = 5,00,000 - 30,000 = 4,70,000. Net outflow = 15,00,000 - 4,70,000 = 10,30,000. Option 10,00,000 ignores tax; 10,70,000 adds tax wrongly; 11,00,000 uses book value.

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