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

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 of $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? Calculate the net value of a second alternative that would allow Tangshan to purchase a better quality asset for $12,000,000 that would provide a $2,600,000 in after-tax inflows for the next 5 years. Which alternative would you choose?

A) $1,795,700, $3,284,400, both
B) $1,500,000, $4,500,000, both
C) ($1,795,700) , ($3,284,400) , neither
D) ($1,795,700) , ($4,500,000) , neither