Question

10-4 ( S al 16) Question Help Asset acquisition decision Zarin Printing Company is considering the acquisition of Freiman Press at a cash price of $50,000 Freiman Press has labilities of $94,000. Freiman has a large press that Zarin needs, the remaining assets would be sold to not $68,000. As a result of acquiring the press, Zarin would experience an increase in cash inflow of $28.000 per year over the next 14 years. The firm has a 14% cost of capital a. What is the effective or net cost of the large press? b. If this is the only way Zarin can obtain the large press, should the firm go ahead with the merger? c. If the firm could purchase a press that would provide slightly better quality and $35,000 annual cash inflow for 14 years for a price of $100,000, which alternative would you recommend? a. The effective or net cost of the large press is $ (Round to the nearest dollar) Incorrect: 0

Answer 1

Year Year Cash Liabilites Remaining assets Cashflow Cost of capital NPV of Press 50000 94000 68000 28000 14 years 14% 168058 Cashflow NPV 28000 24561 28000 21545 28000 18899 28000 16578 28000 14542 28000 12756 28000 11190 28000 9816 28000 8610 28000 7553 28000 6625 Cashflow NPV 1 35000 30702 2 35000 26931 35000 23624 35000 20723 35000 18178 35000 15946 35000 13987 35000 12270 35000 10763 35000 9441 11 35000 8282 Option 1 Cash + liabilites = Assets 50000+94000 = 68000 + Press cost Cost of press = 76000 10 10 11 If it is only way, then we should go ahead with merger because NPV of press is greater than cost of Press Option 2 12 28000 13 28000 14 28000 NPV of pri 5812 5098) 4472 168058 12 13 14 35000 35000 35000 NPV of pri 7265 6372 5590 210073 Option 3 Through merger NPV Cost Benefit 168058 76000 92058 Another option NPV 210073 Cost 100000 Benefit 110073 Since the benefit is higher with new press, I would suggest to go with press giving 35000 as cashflow