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 $220,000, and it will produce earnings before depreciation and taxes of $72,000 per year for three years, and then $35,000 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 Appendix B for an approximate answer but 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.) Net present value b. Based on the net present value, should Universal Electronics purchase the asset? Yes NO Tablo 12-11 Categories for depreciation write-off Class 3-year MACRS All property with ADR midpoints of four years or less. Autos and light trucks are excluded from this category 5-year MACRS Property with ADR mic points of more than 4, but less than 10 years. Key assets in this category include automobiles, light trucks, and techno logical equipment such as computers and research-related properties 7-year MACRS 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. 10-year MACRS 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. 15-year MACRS 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. 20-year MACRS Property with ADR midpoints of 25 years or more (with the exception of real estate, which is treated separately). Key investments in this cat- egory include electric and gas utility property and sewer pipes. 27.5-year Residential rental property if 80% or more of the gross rental income is MACRS from nontransient dwelling units (0.9., an apartment building): low- Income housing 31.5-year Nonresidential real property that has no ADR class ife or whose class MACRS life is 27.5 years or more 39-year MACRS Nonresidential real property placed in service after May 12, 1993. Table 12-12 Depreciation percentages (expressed in decimals) Depreciation Year 3-Year MACRS 5-Year MACRS 7-Year MACRS 10-Year MACRS 15-Year MACRS 20-Year MACRS 2 3 0.333 0.445 0.148 0.074 0.200 0.320 0.192 0.115 0.115 0.058 4 0.143 0.245 0.175 0.125 0.089 0.089 0.089 0.045 5. 6 7 8 0.100 0.180 0.144 0.115 0.092 0.074 0.066 0.066 0.065 0.065 0.033 0.050 0.095 0.086 0.077 0.069 0.062 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.030 10 11 12 13 14 0.038 0.072 0.067 0.062 0.057 0.053 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.017 1.000 15 ... 16 17 18 19 20 21 1.000 1.000 1.000 1.000 1.000 Appendix B Present value of $1. PV PV = FV Period 3% 10% 1 2. 3 4 5 0.909 0.826 0.751 0683 0.621 0564 0513 0.467 0424 0.386 0.350 6 7 8 9 TX 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 0.896 0.887 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0820 0.780 0.742 0.672 0.608 10 11 12 13 14 15 16 17 18 10 20 25 30 40 50 2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673 0.610 0.552 0.45 0.372 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.582 0.570 0.554 0.478 0.412 0.307 0.228 4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 0.375 0.308 0.200 0.141 5% 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614 0585 0.557 0.530 0.505 0.481 0.458 0.436 0.416 0 396 0.377 0.295 0.231 0.142 0.087 Percent 6% 7% 0.943 0.935 0.890 0.873 0,840 0.816 0.792 0.763 0.747 0.713 0.705 0.666 0.665 0.623 0.627 0.582 0.592 0.544 0.558 0.508 0527 0.475 0.497 0.444 0.469 0.415 0.442 0.388 0.417 0.362 0.394 0339 0371 0.317 0350 0.296 0.331 0277 0.312 0.258 0.233 0.184 0.174 0.131 0097 0.067 0.054 0.034 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0502 0.460 0.422 0.388 0356 0.326 0.299 0.275 0.252 0.231 8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215 0.146 0.099 0.046 0.021 0.901 0.812 0731 0.659 0.593 0.535 0.482 0.434 0.391 0.392 0.317 0.286 0.258 0.232 0.200 0.188 0.170 0.153 0.138 0.124 0.074 0044 0.015 0.005 0319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0,149 0.092 0.05% 0.022 0.009 0.893 0.797 0.712 0.636 0562 0.507 0.452 0404 0.361 0.322 0287 0.257 0.229 0205 0.180 0.163 0.146 0 130 0.116 0.104 0.059 0033 0.011 0.003 0212 0.194 0.178 0.116 0.075 0.032 0.013 Copyright 2019 Meraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Menuw.Hill Education Appendix B (concluded) Present value of $1 50% 15 Period 1 2 3 25 0800 0.640 4 un 6 2 0885 0.783 0.693 0.613 0543 04go o 425 0.376 0.333 0295 0.261 0,231 0 204 0.181 0.10 0, 141 0.125 0111 .09B 0.087 0,047 0026 0 000 Oooz 0877 0769 067s s2 0.519 0456 0.400 0 351 0.308 0270 0 237 0.20 0,182 0.160 0.140 0.123 , 108 0.095 0.083 0.073 0.038 0020 0005 o 001 10 11 12 13 0.870 0.756 065B o572 0,497 0432 0376 0327 0.284 0.247 0215 o 187 0.163 0.141 0 123 0.107 0 093 1 0,061 oo30 0015 0 004 0001 16x 0,862 0.743 0641 0.552 0,476 0410 .354 . 305 0,263 0.27 0.195 0.168 0, 145 0.12 0.10 0 093 0,000 0.000 0,000 .051 0.024 0012 0003 0.001 0855 0.731 0.624 0.534 0456 0.390 0333 0285 0,243 0 208 0,178 0 152 0.130 0111 0005 0081 0009 0.059 0.051 0,043 0.020 0.009 18 0.847 .7 18 0609 0515 0.437 0.370 0314 0266 022s . 191 0.162 . 137 0.116 .099 0084 0071 .051 0 043 0037 0016 0.007 0001 Percent 19 .840 0.706 0.593 0.499 0419 0.352 0.96 0249 0.209 0.176 0.148 0.124 0 104 0.088 0 074 0.062 0.052 0 044 0037 0.031 0013 0.005 .001 0 20 0833 0.694 0.579 0,482 0402 0.335 0.279 0233 0.194 0.162 0.135 0.112 0 093 0 078 0,065 0.054 0045 003B 0031 0026 0.010 0.00A 0.001 0 30 0,769 0,592 0,455 0.350 089 007 . 159 0 123 0 094 0.073 .056 0.043 0.025 0.020 0,015 0512 04 10 0328 0 262 0210 0.168 0.134 0.107 0 086 0.069 0.055 0044 0035 0028 0.023 .018 0014 .012 0.00 0.00 35 0741 0549 0406 0301 0223 0.165 0.122 0 091 0.067 0.00 0.037 0027 0.020 0015 0011 0.008 0 006 0 00s 0003 0 002 0 001 40 0.7 14 0.510 0364 0 260 0.186 0.133 0095 00GB 0.04B 0035 0025 0018 0.013 0009 O006 0005 0.002 0002 0 001 0667 0.444 0296 0.198 0.132 0.088 0059 0.039 0026 0017 0012 0008 0005 0.002 2 0001 0001 14 15 16 17 18 19 20 25 30 0,012 0.000 0007 0 00s 0.001 o o o o o o 0 0 40 0 002 0 0