Chapter 12, Problem 29P

Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12-11 to determine in what depreciation category the asset falls. The asset will cost $\text{\$120,000,}$ and it will produce earnings before depreciation and taxes of $\text{\$37,000}$ per year for 3 years, and then $19,000 a year for 7 more years. The firm has a tax rate of 25 percent. With a cost of capital of 12 percent, should it purchase the asset? Use the net present value method. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation.