Zarin Printing Company is considering the acquisition of Freiman Press at a cash price of $60,000. Freiman Press has liabilities of $90,000. Freiman has a large press that Zarin needs; the remaining assets would be sold to net $65,000. As a result of acquiring the press, Zarin would experience an increase in cash inflow of $20,000 per year over the next 10 years. The firm has a 14% cost of capital.
a. What is the effective or net 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? Explain your answer.
c. If the firm could purchase a press that would provide slightly better quality and $26,000 annual cash inflow for 10 years for a price of $120,000, which alternative would you recommend? Explain your answer.