Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12â8 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 $45,000 per year for three years, and then $23,000 a year for seven more years. The firm has a tax rate of 30 percent and a cost of capital of 14 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Appendix B.
(a) Calculate the net present value. (Round "Percentage depreciation" and "PV Factor" to 3 decimal places. Round all dollar values to the nearest whole number. Omit the "$" sign in your response.)
Net present value $
(b) Based on the net present value, should the Universal Electronics purchase the asset? Yes No
| Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12â8 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 $45,000 per year for three years, and then $23,000 a year for seven more years. The firm has a tax rate of 30 percent and a cost of capital of 14 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Appendix B. |
| (a) | Calculate the net present value. (Round "Percentage depreciation" and "PV Factor" to 3 decimal places. Round all dollar values to the nearest whole number. Omit the "$" sign in your response.) |
| Net present value | $ |
| (b) | Based on the net present value, should the Universal Electronics purchase the asset? | ||||
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Related questions
| Propulsion Labs will acquire new equipment that falls under the five-year MACRS category. The cost is $340,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years: |
| Use Table 12-9 and Appendix B. |
| Year 1 | $ | 121,000 |
| Year 2 | 140,000 | |
| Year 3 | 100,000 | |
| Year 4 | 60,000 | |
| Year 5 | 55,000 | |
| Year 6 | 32,000 | |
| The firm is in a 40 percent tax bracket and has a 12 percent cost of capital. |
| (a) | Calculate the net present value. (Negative amounts should be indicated by a minus sign. Round "PV Factor", "Percentage depreciation" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.) |
| Net present value | $ |
| (b) | Under the net present value method, should Propulsion Labs purchase the equipment asset? | ||||
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DataPoint Engineering is considering the purchase of a new piece of equipment for $410,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $230,000 in nondepreciable working capital. Seventy-seven thousand dollars of this investment will be recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation and taxes for the next six are shown in the following table. Use Table 12â11, Table 12â12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
| Year | Amount | ||||
| 1 | $ | 236,000 | |||
| 2 | 194,000 | ||||
| 3 | 164,000 | ||||
| 4 | 149,000 | ||||
| 5 | 112,000 | ||||
| 6 | 102,00 | ||||
The tax rate is 30 percent. The cost of capital must be computed based on the following:
| Cost (aftertax) | Weights | ||||||||
| Debt | Kd | 10.20 | % | 30 | % | ||||
| Preferred stock | Kp | 12.50 | 20 | ||||||
| Common equity (retained earnings) | Ke | 19.00 | 50 | ||||||
a. Determine the annual depreciation schedule.
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The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $100,000. Of this amount, $80,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $20,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. The contract will require an additional investment of $42,000 in working capital at the beginning of the first year and, of this amount, $22,000 will be returned to the Spartan Technology Company after six years. The investment will produce $40,000 in income before depreciation and taxes for each of the six years. The corporation is in a 30 percent tax bracket and has a 15 percent cost of capital
. a. Calculate the net present value
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Propulsion Labs will acquire new equipment that falls under the five-year MACRS category. The cost is $300,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years:
| Year 1 | $ | 110,000 | |||||||||||||||
| Year 2 | 120,000 | ||||||||||||||||
| Year 3 | 75,000 | ||||||||||||||||
| Year 4 | 50,000 | ||||||||||||||||
| Year 5 | 56,000 | ||||||||||||||||
| Year 6 | 33,000 | ||||||||||||||||
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