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 1211 to determine in what depreciation category the asset falls. (Hint: It is not 10 years.) The asset will cost $210,000, and it will produce earnings before depreciation and taxes of $68,000 per year for three years, and then $31,000 a year for seven more years. The firm has a tax rate of 25 percent. Assume the cost of capital is 13 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.

a. Calculate the net present value.

Note: Do not round intermediate calculations and round your answer to 2 decimal places.

NPV = ______

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

Multiple Choice:

Yes

No