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?