Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation...

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Universal Electronics is considering the purchase ofmanufacturing equipment with a 10-year midpoint in its assetdepreciation range (ADR). Carefully refer to Table 12–11 todetermine in what depreciation category the asset falls. (Hint: Itis not 10 years.) The asset will cost $130,000, and it will produceearnings before depreciation and taxes of $36,000 per year forthree years, and then $18,000 a year for seven more years. The firmhas a tax rate of 36 percent. Assume the cost of capital is 10percent. In doing your analysis, if you have years in which thereis no depreciation, merely enter a zero for depreciation. Use Table12–12. Use Appendix B for an approximate answer but calculate yourfinal answer using the formula and financial calculator methods. a.Calculate the net present value. (Do not round intermediatecalculations and round your answer to 2 decimal places.) b. Basedon the net present value, should Universal Electronics purchase theasset? Yes No

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3.6 Ratings (634 Votes)


As per Table 12-11,Properties with 10 year midpoint in ADR will fall into 7 Year MACRS
Most of the manufacturing equipment fall in this category

	Present Value (PV) of Cash Flow:
	(Cash Flow)/((1+i)^N)
	i=Discount Rate=Cost of Capital=10%=0.1
	N=Year of Cash Flow

N	Year	0	1	2	3	4	5	6	7	8	9	10
A	Initial Cost	($130,000)
EBDT	Earning Before Depreciation & Taxes		$36,000	$36,000	$36,000	$18,000	$18,000	$18,000	$18,000	$18,000	$18,000	$18,000
B	MACRS 7 Year Depreciation Rate		14.29%	24.49%	17.49%	12.49%	8.93%	8.92%	8.93%	4.46%	0.00%	0.00%
C=130000*B	Annual Depreciation		$18,577	$31,837	$22,737	$16,237	$11,609	$11,596	$11,609	$5,798	$0	$0
EBT=EBDT-C	Earning Before Taxes		$17,423	$4,163	$13,263	$1,763	$6,391	$6,404	$6,391	$12,202	$18,000	$18,000
T=EBT*36%	Taxes		$6,272	$1,499	$4,775	$635	$2,301	$2,305	$2,301	$4,393	$6,480	$6,480
D=EBT-T	Operating Income		$11,151	$2,664	$8,488	$1,128	$4,090	$4,099	$4,090	$7,809	$11,520	$11,520
C	Add: Depreciation (Non Cash expense)		$18,577	$31,837	$22,737	$16,237	$11,609	$11,596	$11,609	$5,798	$0	$0
CF=D+C+A	Cash flow	($130,000)	$29,728	$34,501	$31,225	$17,365	$15,699	$15,695	$15,699	$13,607	$11,520	$11,520	SUM
PV=CF/(1.1^N)		($130,000)	$27,025.20	$28,513.49	$23,460.05	$11,860.75	$9,747.99	$8,859.17	$8,056.19	$6,347.90	$4,885.60	$4,441.46	$3,197.79
NPV=Sum of PV	Net Present Value	$3,197.79
	YES,
	Universal Electronics should purchase the asset
	Because Net Present Value is positive

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Transcribed Image Text

Universal Electronics is considering the purchase ofmanufacturing equipment with a 10-year midpoint in its assetdepreciation range (ADR). Carefully refer to Table 12–11 todetermine in what depreciation category the asset falls. (Hint: Itis not 10 years.) The asset will cost $130,000, and it will produceearnings before depreciation and taxes of $36,000 per year forthree years, and then $18,000 a year for seven more years. The firmhas a tax rate of 36 percent. Assume the cost of capital is 10percent. In doing your analysis, if you have years in which thereis no depreciation, merely enter a zero for depreciation. Use Table12–12. Use Appendix B for an approximate answer but calculate yourfinal answer using the formula and financial calculator methods. a.Calculate the net present value. (Do not round intermediatecalculations and round your answer to 2 decimal places.) b. Basedon the net present value, should Universal Electronics purchase theasset? Yes No