General manufacturing company consists of several division, one of which is the

Question

General manufacturing company consists of several division, one of which is the transportation division. The company has decided to dispose of this division since it no longer fits the company’s long-term strategy. An offer of $9,000,000 has been received from a prospective buyer. If general retained the division, the company would operate the division for only nine years, after which the division would no longer be needed and would be sold for $600,000. If the company retains the division, an immediate investment of $500,000 would need to be made to update equipment to current standards. Annual net operating cash flows would be $1,805,000 if the division is retained. The company’s discount rate is 12%.

Required:

Using the net present value method, determine whether general manufacturing should accept or reject the offer made by the potential buyer. (please show all your works!)

Explanation / Answer

The CHegg has some issues with Advanced Editor So giving you link of Excel File On drive...... https://docs.google.com/file/d/0B2tzwZptYqwBMUY0d2NJZUFQcWM/edit?usp=sharing PLEASE RATE ONLY TO ONE PERSON THE HIGHEST RATING IN ORDER TO GIVE HIM/HER POINTS OR ELSE ALL POINTS WILL GO TO THE FIRST ANSWERER ONLY.. PLEASE CONSIDER THE TIME DEVOTED AND RATE ME LIFESAVER POINTS.. Also Here the Answer is done... If the division is retained Intial Cash Outflow 5,000,000.00 Particulars Yearly Income (A) Calculation of dicount values - working Discount Values Calculated (B) Present Value of Cash Inflows(C=A*B) Yearly Cash Inflows Year 1 1,805,000.00 1.12 0.8929 1611607 Year 2 1,805,000.00 1.25 0.7972 1438935 Year 3 1,805,000.00 1.40 0.7118 1284763 Year 4 1,805,000.00 1.57 0.6355 1147110 Year 5 1,805,000.00 1.76 0.5674 1024205 Year 6 1,805,000.00 1.97 0.5066 914469 Year 7 1,805,000.00 2.21 0.4523 816490 Year 8 1,805,000.00 2.48 0.4039 729009 Year 9 1,805,000.00 2.77 0.3606 650901 ToTal Yearly Cash Inflows (A) 9617491 Year 9 .. Residual Value 6,000,000.00 0.3606 (B) 2163660 Total(A+B) 11781151 Therefore, Total Cash Inflows 11,781,151.02 Less: Initial Investment. 5,000,000.00 Net Income From Division over the future. 6,781,151.02 Comparing the (Net Income From Division over the future.) with offering of Buyer. Net Income From Division over the future. Current Income If the division Is sold 6,781,151 9,000,000 If the Division is sold currently then we get Net Cash flow of . 2,218,849 Thus general manufacturing should accept the offer made by the potential buyer PLEASE RATE ONLY TO ONE PERSON THE HIGHEST RATING IN ORDER TO GIVE HIM/HER POINTS OR ELSE ALL POINTS WILL GO TO THE FIRST ANSWERER ONLY.. PLEASE CONSIDER THE TIME DEVOTED AND RATE ME LIFESAVER POINTS..

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.