1. The board of Samad Corp., a family-owned corporation, wishes to sell the business and is considering three offers:
- Get paid $568,000 immediately.
- $200,000 cash now plus an annual installment for 10 years at the end of the year, or a total of $800,000.
- An offer to manage the business for 10 years that would yield $96,000 cash at the end of the year for 10 years. The company would have to make a $20,000 investment upfront to make certain changes for the management agreement. The total cash Samad would receive is $940,000.
Samad wants an 11% rate of return on its investments.
Based on the numbers, which offer should Samad's board accept? Show your supporting computations.
2.the two options are as follows:
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Correa Co.
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Grant Inc
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Cost (cash price)
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$100,000
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$90,000
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|
Operating costs per year
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$7,000
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$8,000
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|
Estimated useful life
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8
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8
|
|
Estimated residual (salvage) value as percent of cost
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20%
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10%
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Assume all other variables are identical for the two machines.
2a. Analyze and compare the relative cost of the two machines. Costwise, which is better?
2b. What other factors should O'Donnell consider besides the numbers?