Problem 12-29 MACRS depreciation and net present value [LO4] Universal Electroni
ID: 2791992 • Letter: P
Question
Problem 12-29 MACRS depreciation and net present value [LO4]
Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12–8 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 $285,000 and it will produce earnings before depreciation and taxes of $92,000 per year for three years, and then $45,000 a year for seven more years. The firm has a tax rate of 30 percent and a cost of capital of 13 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Appendix B.
Calculate the net present value. (Round "Percentage depreciation" and "PV Factor" to 3 decimal places. Round all dollar values to the nearest whole number. Omit the "$" sign in your response.)
Net Present Value: ___?___
Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12–8 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 $285,000 and it will produce earnings before depreciation and taxes of $92,000 per year for three years, and then $45,000 a year for seven more years. The firm has a tax rate of 30 percent and a cost of capital of 13 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Appendix B.
(a)Calculate the net present value. (Round "Percentage depreciation" and "PV Factor" to 3 decimal places. Round all dollar values to the nearest whole number. Omit the "$" sign in your response.)
Net Present Value: ___?___
Explanation / Answer
Tables 12.8 and 12.9 have not been given in the question. So, we assume a reducing balance method for depreciation which reduces the value of the asset to 0 in 10 years starting from year1 to year 10. By trial and error method, the depreciation rate (reducing balance) is 50% per annum.
NPV =$ 31470.8401
Since only 5 years are shown, we show the next 5 years below: