Question

Asset acquisition decision Zarin Printing Company is considering the acquisition of Freiman Press at a cash price of $50,000. Freiman Press has liabilities of $94,000. Freiman has a large press that Zarin needs, the remaining assets would be sold to not $68,000 As a result of acquiring the press, Zarin would experience an increase in cash inflow of $28,000 per year over the next 14 years. The firm has a 14% cost of capital a. What is the effective or not cost of the large press? b. If this is the only way Zarin can obtain the large press, should the firm go ahead with the merger? c. If the form could purchase a press that would provide slightly better quality and $35,000 annual cash inflow for 14 years for a price of $100,000, which alternative would you recommend? a. The effective or not cost of the large press is $ 70000 (Round to the nearest dollar) b. The net present value of the merger is $ (Round to the nearest cent) Incor

Answer 1

Part-a:

Effective or Net Cost of large press = Cash Price + (Liability-Asset)

= 50,000 + (94,000-68,000)

= 50,000 + 26,000

= $76,000

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Part-b:

Net present value of merger = Present Value of Increased Cash Inflows from large press – Initial Investment (i.e. Effective or Net Cost of large press)

= 28,000*PVIFA(14%,14) – 76,000

= (28,000*6.0021) – 76,000

= 168,058.80 – 76,000

= $92,058.80

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Part-c:

Net present value of better quality press = Present Value of Increased Cash Inflows from large press – Initial Investment (i.e. Purchase Price of Press)

= 35,000*PVIFA(14%,14) – 100,000

= (35,000*6.0021) – 100,000

= 210,073.50 – 100,000

= $110,073.50

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Therefore, second alternative is better since it has a higher NPV ($110,073.50 as compared to $92,058.80).