QUESTION 4

Knab Corporation is considering acquiring Deerson Corporation for K40,000. Deerson has liabilities of K62,000. Deerson has machinery that Knab wants, and the remaining assets would be sold for K55,000. The machinery will furnish Knab with an increase in annual cash flow of K7,000 for the next 10 years. The cost of capital is 12 percent.

(a) What is the net cost of the machinery?

(b) Should the acquisition be made?