Question

Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to(Hint: It is not 10 years.) The asset will cost $200,000, and it will produce earnings before depreciation and taxes of $60,000 per year for three years, and then $30,000 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. calculate your final answer using the formula and financial calculator methods.

a. Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

Answer and Explanation:

Given Information:

• The initial investment the equipment is $200,000
• The life of the project is 10 years
• The depreciation category the equipment falls if equipment with a 10-year midpoint in its asset depreciation ranges (ADR). Is 7 years - MARCS category
• Depreciation expense is calculated as per 7 years - MARCS category during the life of the project

Marcs 7 Year depreciation schedule
Year	capitalized cost	depreciation rate	Depreciation expense
1	$200,000	14.29%	$28580
2	$200,000	24.49%	$48980
3	$200,000	17.49%	$34980
4	$200,000	12.49%	$24980
5	$200,000	8.93%	$17860
6	$200,000	8.92%	$17840
7	$200,000	8.93%	$17860
8	$200,000	4.46%	$8920
9	$200,000		$0.00
10	$200,000		$0.00
		100.00%	$200,000

• The earnings before depreciation and taxes ⁹of $60,000 per year for three years, and then $30,000 a year for seven more years.
• The tax rate is 25%
• The discount rate is 12%

hence npv= $17867.61