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Statement: A state undertaking has spent 9 crore rupees over six years on a water channel for a small power house. An independent estimate now puts the cost of finishing the channel at 14 crore and what the power house would earn when working at 40 lakh a year. The same 14 crore, put into the undertaking's two existing power houses, would earn about 2 crore a year. Which of the following courses of action follows from the statement?

Competition practiceLogical / Critical
  • AThe channel should be finished, since 9 crore has already been sunk in it
  • BThe channel should be finished, since the undertaking would otherwise have to account to the state for the 9 crore
  • CThe 14 crore should be divided between the channel and the two existing power houses
  • DThe 14 crore should go to the two existing power houses, the 9 crore already spent being beyond recovery on either course and therefore no reason for preferring one to the other

Step-by-Step Solution

The only sum still to be decided is the 14 crore, and it earns 40 lakh in the channel against 2 crore in the existing power houses — five times as much. The 9 crore is spent whichever way the choice falls and so weighs on neither side. Finishing because 9 crore has gone in is that irrelevance turned into a reason. Finishing to avoid having to account for the 9 crore adds a further 14 crore to the loss in order to keep the first loss off the record. And splitting the money between the two starves the profitable use to feed the unprofitable one, for which the statement gives no reason at all.
Answer: D) The 14 crore should go to the two existing power houses, the 9 crore already spent being beyond recovery on either course and therefore no reason for preferring one to the other

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