General Manufacturing Company Consists of Several Divisions,one of Which Is

question 22

Essay

General Manufacturing Company consists of several divisions,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.

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Definitions:

Aggressive Working Capital Policy

A strategy emphasizing minimal cash and inventory levels and maximizing short-term liabilities to fund operations and investments.

Permanent Working Capital

Permanent Working Capital is the minimum amount of capital that a company needs to operate effectively and continuously over the long term.

Financing Current Assets

The process of obtaining funds to cover short-term operational needs such as inventory, accounts receivable, and day-to-day expenses.

Short-Term Debt

Borrowings and obligations payable within one year, often used to meet immediate financing needs or manage cash flow efficiently.