Lorzo-Perez International has a subsidiary, the DelRay Sorter Company. The company believes the subsidiary on average will generate $1 million per year in annual net cash flows after necessary capital expenditures. These annual net cash flows are projected far into the future (assume infinity). The required rate of return for the subsidiary is 12 percent. If the company were to invest an additional $10 million now, it is believed that annual net cash flows could be increased from $1 to $2 million. Exson Corporation has expressed an interest in DelRay, because it is in the sorter business and believes it can achieve some economies. Accordingly, it has made a cash offer of $10 million for the subsidiary. Should Lorzo-Perez
a. Continue the business as is?
b. Invest the additional $10 million?
c. Sell the subsidiary to Exson? (Assume the subsidiary is entirely equity financed.)