Universal Electronics is considering the purchase of manufacturing equipment wit

Question

Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12–11 to determine in what depreciation category the asset falls. (Hint: It is not 10 years.) The asset will cost $120,000, and it will produce earnings before depreciation and taxes of $37,000 per year for three years, and then $19,000 a year for seven more years. The firm has a tax rate of 40 percent. Assume the cost of capital is 12 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value.

Explanation / Answer

$ 3,038

7 years life Years 1 2 3 4 5 6 7 8 9 10 Total ($) Earning before depreciationand taxes 37000 37000 37000 19000 19000 19000 19000 19000 19000 19000 Less:Depreciation 17,148 29,388 20,988 14,988 10,716 10,704 10,716 5,352 0 0 Earning before tax 19,852 7,612 16,012 4,012 8,284 8,296 8,284 13,648 19,000 19,000 Less: Tax 7,941 3,045 6,405 1,605 3,314 3,318 3,314 5,459 7,600 7,600 Earning after tax 11,911 4,567 9,607 2,407 4,970 4,978 4,970 8,189 11,400 11,400 Add: Depreciation 17,148 29,388 20,988 14,988 10,716 10,704 10,716 5,352 0 0 Cash inflow 29,059 33,955 30,595 17,395 15,686 15,682 15,686 13,541 11,400 11,400 Discount factor 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 Present value of cash inflow 25946 27069 21777 11055 8901 7945 7096 5469 4111 3670 123038 Less: Initial outlay 120000 Net Present value 3038

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