Net cash outflow from machine disposal and replacement

Steps:

• Compute accumulated depreciation at 10% reducing balance: Year 1 = 0.1 × $10,000 =$1,000; Year 2 = 0.1 × $9,000 =$900; total = $1,900.
• Determine book value: $10,000 -$1,900 = $8,100.
• Find sale proceeds: book value - loss = $8,100 -$700 = $7,400 (cash inflow).
• Calculate net cash decrease: replacement cost - proceeds = $12,400 -$7,400 = $5,000.

Why the correct option is correct:

• Option B matches the net cash outflow formula: cash paid for new asset minus cash received from old asset sale, using reducing balance depreciation to find proceeds.

Why the others are wrong:

• A ignores depreciation details, understating outflow by assuming higher proceeds.
• C adds costs without subtracting proceeds, overstating decrease.
• D includes original cost erroneously, treating it as additional outflow.

Final answer: B