Problem 12-29 MACRS depreciation and net present value [LO4]

Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 1211 to determine in what depreciation category the asset falls. (Hint: It is not 10 years.) The asset will cost $120,000, and it will produce earnings before depreciation and taxes of $35,000 per year for three years, and then $16,000 a year for seven more years. The firm has a tax rate of 34 percent. Assume the cost of capital is 11 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Table 1212. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. blo61612_app_A-A8.pdf

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

Net present value

$

b.

Based on the net present value, should Universal Electronics purchase the asset?

	Yes
	No