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HAL Co is considering purchasing SO Co and has produced the following valuations:
1 Historical cost adjusted for general inflation $3m
2 Economic value – Net present value of projects $6m
3 Piecemeal net realizable value $4m
4 Cost of setting up an equivalent business $5m
What is the maximum HAL Co should pay based on the above?
A $3 million
B $6 million
C $5 million
D $4 millionThe piecemeal NRV is less than the cost of setting up an equivalent business
but the right answer is C why?They are not buying the company so they can immediately sell the assets.
They could set up the business themselves for $5M and so $5M is the most that is worth paying for SO Co..
($4M is the minimum that SO Co would accept, because they could sell the assets separately for $4M)
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