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Acquisition of Assets for Cash. Master Corporation wants to buy certain fixed assets of Smith Corporation. However, Smith Corporation wants to dispose of its entire business. The balance sheet of Smith follows:
ASSETS
Cash
$ 2,000
Accounts receivable
8,000
Inventories
20,000
Equipment 1
10,000
Equipment 2
Equipment 3
35,000
Building
90,000
Total assets
$185,000
LIABILITIES AND
STOCKHOLDERS' EQUITY
Total liabilities
$ 80,000
Total stockholders' equity
105,000
Total liabilities and stockholders'
equity
Master needs only equipment 1 and 2 and the building. The other assets excluding cash can be sold for $35,000. Smith wants $48,000 for the entire business. It is anticipated that the after-tax cash inflows from the new equipment will be $30,000 a year for the next 8 years. The cost of capital is 12 percent.
(a) What is the initial net cash outlay?
(b) Should the acquisition be made?
All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero?
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