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 $140,000, and it will produce earnings before depreciation and taxes of $50,000 per year for three years, and then $24,000 a year for seven more years. The firm has a tax rate of 25 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.

Answer 1

Solution:-

This property will fall under 7 year MACRS depreciation. Property with ADR midpoint of 10 years or more but less than 16 years are fall under this category.

To Calculate Net present Value of the Project-

Universal electronics should purchase the Equipment because Net Present Value is poistive.

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