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

Vindhya Steel is evaluating a project requiring Rs 6,00,000 of equipment and Rs 1,00,000 of working capital that is recovered at the end of year 4. Rs 50,000 already spent on a feasibility study is sunk. The project runs for 4 years. Which amount is the correct initial cash outflow for NPV purposes at time zero?

The relevant time-zero outflow is Rs 7,00,000, being equipment of Rs 6,00,000 plus working capital of Rs 1,00,000. The Rs 50,000 feasibility study is a sunk cost already incurred and does not change with the decision, so it is excluded from incremental cash flows.

  1. ARs 7,00,000Correct
  2. BRs 7,50,000
  3. CRs 6,00,000
  4. DRs 6,50,000

Explanation

Initial outflow includes equipment Rs 6,00,000 and working capital Rs 1,00,000, totalling Rs 7,00,000. The feasibility study cost is sunk and irrelevant, so including it (Rs 7,50,000) is wrong. Omitting working capital (Rs 6,00,000) is also wrong.

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