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. b. Based on the net present value, should Universal Electronics purchase the asset? Yes No Please can you show the step by step solution. Thank you.

Answer 1

Solution:-

Manufacturing Equipment has a 10 year midpoint of its assets depreciation range which falls into seven year MACRS Category as indicated in Table. With seven year Depreciation, Asset will be depreciated over 8 years.

To Calculate NPV of the Project-

It is advisable to purchase the Machine as NPV of the Machine is Positive.

If you have any query related to question then feel free to ask me in a comment.Thanks.