P Company is considering the acquisition of S Inc. To assess theamount it might be willing to pay, P makes the followingcomputations and assumptions: A. S Inc. has identifiable assetswith a total fair value of $8,000,000 and liabilities of$5,300,000. The assets include office equipment with a fair valueapproximating book value, buildings with a fair value 30% higherthan book value, and land with a fair value 60% higher than bookvalue. The remaining lives of the assets are deemed to beapproximately equal to those used by Barkley, Inc. B. S Inc.'spretax incomes for the years 2010 through 2012 were $700,000,$900,000, and $550,000, respectively. P believes that an average ofthese earnings represents a fair estimate of annual earnings forthe indefinite future. However, it may need to consider adjustmentsfor the following items included in pretax earnings: Depreciationon Buildings (each year) 580,000 Depreciation on Equipment (eachyear) 30,000 Extraordinary Loss (year 2012) 200,000 Salary expense(each year) 150,000 C. The normal rate of return on net assets forthe industry is 20%. Required: Assume further that P feels that itmust earn a 15% return on its investment, and that goodwill isdetermined by capitalizing excess earnings. Based on theseassumptions, calculate a reasonable offering price for S, Inc.