Master corporation wants to buy certain fixed assets of

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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

20,000

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

$185,000

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?

Reference no: EM13484625

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