Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12-8 to determine in what depreciation category the asset falls
(Hint: It is not 10 years.), and to Table 12-9 to determine the percent depreciation rate for each year. The asset will cost $140,000 and it will produce earnings before depreciation and taxes of $45,000 per year for three years, and then $23,000 a year for seven more years.
The firm has a tax rate of 30 percent and a cost of capital of 14 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Appendix B.
(a) Calculate the net present value. (Round "Percentage depreciation" and "PV Factor" to 3 decimal places. Round all dollar values to the nearest whole number. Omit the "tiny_mce_markerquot; sign in your response.)
Net present value $
(b) Based on the net present value, should the Universal Electronics purchase the asset?
Yes
No