Universal Electronics is considering the purchase of manufacturing equipment wit
ID: 2803372 • Letter: U
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 $285,000, and it will produce earnings before depreciation and taxes of $92,000 per year for three years, and then $45,000 a year for seven more years. The firm has a tax rate of 30 percent. Assume the cost of capital is 13 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. blo61612_app_A-A8.pdf a. Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.) Net present value $ b. Based on the net present value, should Universal Electronics purchase the asset? Yes No
Explanation / Answer
Statement showing Depreciation
Asset will fall under 7 year MACRs depreciation
Statement showing NPV
Since NPV is positive he should buy the machine
Year Opening balance Depreciation rates Depreciation Closing balance 1 285000 14.29% 40727 244274 2 244274 24.49% 69797 174477 3 174477 17.49% 49847 124631 4 124631 12.49% 35597 89034 5 89034 8.93% 25451 63584 6 63584 8.92% 25422 38162 7 38162 8.93% 25451 12711 8 12711 4.46% 12711 0Related Questions
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