Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 128 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 $50,000 per year for three years, and then $24,000 a year for seven more years. The firm has a tax rate of 34 percent and a cost of capital of 12 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 "$" sign in your response.)

Net present value

$

(b)

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

	Yes
	No

12-8

12-9

appendix B

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 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. 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 manu- factured 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 distri- bution, 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 category include electric and gas utility property and sewer pipes. 27.5-year MACRS Residential rental property if 80% or more of the gross rental income is from nontransient dwelling units (e.g., an apartment building); low-income housing. 31.5-year MACRS Nonresidential real property that has no ADR class life or whose class life is 27.5 years or more. 39-year MACRS Nonresidential real property placed in service after May 12, 1993