Tangshan Mining Is Considering the Acquisition of Zhengsen Mining at a Cash

question 20

Multiple Choice

Tangshan Mining is considering the acquisition of Zhengsen Mining at a cash price of $6,000,000. The primary motivation for Tangshan's purchase of Zhengsen is for a special piece of drilling equipment that it believes will generate after-tax cash flows if $2,000,000 per year during the next 5 years. Zhengsen Mining has liabilities of $9,000,000 and Tangshan estimates that it can sell the remaining assets $6,500,000. Tangshan will use a 15 percent cost of capital for evaluating the acquisition. Based on this information, what is the net value of the special drilling equipment?

• A) $1,795,690
• B) $1,500,000
• C) ($1,795,690)
• D) ($1,500,000)

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