Luxe Foods is contemplating acquisition of Valley Canning Company for a cash price of $180,000. Luxe currently has high financial leverage and therefore has a cost of capital of 14%. As a result of acquiring Valley Canning, which is financed entirely with equity, the firm expects its financial leverage to be reduced and its cost of capital to drop to 11%. The acquisition of Valley Canning is expected to increase Luxe’s cash inflows by $20,000 per year for the first three years and by $30,000 per year for the following 12 years.

a. Calculate the net present value of the proposed cash acquisition to determine whether it is desirable. Explain your answer.

b. If the firm’s financial leverage would actually remain unchanged as a result of the proposed acquisition, would this alter your recommendation in part a? Support your answer with numerical data.