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 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?