Problem 12-27 (Algo) MACRS depreciation and net present value [LO12-4] 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 $265,000, and it will produce earnings before depreciation and taxes of $88,000 per year for three years, and then $41,000 a year for seven more years. The firm has a tax rate of 25 percent. Assume the cost of capital is 14 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 ! for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value. Note: Do not round intermediate calculations and round your answer to 2 decimal places. Table 12-11 Categories for depreciation write-off \begin{tabular}{|l|l|} \hline Class & All property with ADR midpoints of 4 years or less. Autos and light trucks are excluded from this category. \\ \hline 3-year MACRS & \begin{tabular}{c} Property with ADR midpoints of more than 4, but less than 10 years. Key assets in this category include automobiles, light trucks, \\ and technological equipment such as computers and research-related properties. \end{tabular} \\ \hline 5-year MACRS & \begin{tabular}{c} Property with ADR midpoints of 10 years or more, but less than 16 years. Most types of manufacturing equipment would fall into this \\ category, as would office furniture and fixtures. \end{tabular} \\ \hline 7-year MACRS & \begin{tabular}{c} Property with ADR midpoints of 16 years or more, but less than 20 years. Petroleum refining products, railroad tank cars, and \\ manufactured homes fall into this group. \end{tabular} \\ \hline 10-year MACRS & \begin{tabular}{c} Property with ADR midpoints of 20 years or more, but less than 25 years. Land improvement, pipeline distribution, telephone \\ distribution, and sewage treatment plants all belong in this category. \end{tabular} \\ \hline 20-year MACRS & \begin{tabular}{c} Property with ADR midpoints of 25 years or more (with the exception of real estate, which is treated separately). Key investments in \\ this category include electric and gas utility property and sewer pipes. \end{tabular} \\ \hline 27.5-year MACRS & \begin{tabular}{c} Residential rental property if 80 percent or more of the gross rental income is from nontransient dwelling units (e.g., an apartment \\ building); low-income housing. \end{tabular} \\ \hline 31.5-year MACRS & Nonresidential real property that has no ADR class life or whose class life is 27.5 years or more. \\ \hline 39-year MACRS & Nonresidential real property placed in service after May 12, 1993. \\ \hline \end{tabular} Table 12-12 Depreciation percentages (expressed in decimals) Appendix B Present value of $1,PVIF PV=FV[1/(1+i)n]