Bing Manufacturing Company consists of several divisions, one of which is the Tr
ID: 2482016 • Letter: B
Question
Bing Manufacturing Company consists of several divisions, one of which is the Transportation Division. The company has decided to dispose of this division because it no longer fits the company's long-term strategy. An offer of $9,000,000 has been received from a prospective buyer. If Bing 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%. (Ignore income taxes in this problem.)
Required:
Using the net present value method, determine whether Bing Manufacturing should accept or reject the offer made by the potential buyer.
Explanation / Answer
Net present value of Retaining the division
Net present value = -initial Investment + Annual net operating cash flows*(1-(1+r)^-n)/r + Salvage Value*(1+r)^-n
Net present value = -500000 + 1805000*(1-(1+12%)^-9)/12% + 600000*(1+12%)^-9
Net present value = $ 9,333,856.89
Offer Price for Division = $ 9,000,000
Decision : Bing Manufacturing should reject the offer made by the potential buyer , since Net present value of Retaining the division is more than the Offer Price for Division.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.