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 $130,000, and it will produce earnings before depreciation and taxes of $36,000 per year for three years, and then $18,000 a year for seven more years. The firm has a tax rate of 25 percent. Assume the cost of capital is 10 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.

Table 12-11

Table 12-2

Appendix B

Table 12-11 Categorles for depreclation write-off Class 3-year MACRS 5-year MACRS 7-year MACRS 10-year MACRS 15-year MACRS 20-year MACRS 27.5-year MACRS 31.5-year MACRS All property with ADR midpoints of four years or less. Autos and light trucks are excluded from this category. 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. 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. 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. 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. 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. Residential rental property if 80% or more of the gross rental income is from nontransient dwelling units (e.g., an apartment building); lowincome housing. Nonresidential real property that has no ADR class life or whose class life is 27.5 years or more. Nonresidential real property placed in service after May 12, 1993. Table 12-12 Depreclation percentages (expressed In decimals)