Problem 12-29 MACRS depreciation and net present value [LO4] Universal Electroni
ID: 2792005 • 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 $45,000 a year for seven more years. The firm has a tax rate of 30 percent and a cost of capital of 13 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Appendix B.
(a) Calculate the net present value. (Round "Percentage depreciation" and "PV Factor" to 3 decimal places. Round all dollar values to the nearest whole number. Omit the "$" sign in your response.)
Net Present Value: ___?___ The Answer is not $31470.8401
Explanation / Answer
Solution:
a) Calculation of the Present Value:
The First Step is to Determine the Annual Depreciation of the Equipment,
Then we have to Calculate the Annual Cash Flows,
After Calculating the Cash Flows for 10 Years, we Can Calculate the Net Present Value of the Equipment:
Therefore, the Net Present Value is $20,229 and is Positive, Thus, the New Asset Should be Purchased.
Year Depreciation Base Percentage Depreciation Annual Depreciation 1 $285,000 0.143 $40,755 2 $285,000 0.245 $69,825 3 $285,000 0.175 $49,875 4 $285,000 0.125 $35,625 5 $285,000 0.089 $25,365 6 $285,000 0.089 $25,365 7 $285,000 0.089 $25,365 8 $285,000 0.045 $12,825 $285,000