Question

Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its assot depreciation Fange (ADR) Carefully refer to Table 12-11 to determine is a depreciation category the asset alls. (Hint: It is not 10 years) The asset will cost $275.000, and it will produce canings before depreciation and traces of 590.000 per year for three years, and then 544,000 a year for seven more years The firm has a tax rate of 35 percent. Assume the cost of capitals 13 percent in doing your way you have years in which there is no depreciation, merely entered for depreciation Use Table 12-12 Use Appendix for an approximate answer but calculate your final answer using the formula and financial calculator methods a. Calculate the net present value. Do not round Intermediate calculations and round your answer to 2 decimal places) Nel present value b. Based on the net present value whould Universal Electronics purchase

Answer 1

The asset falls in the 7-year ADR category. The depreciation schedule is:

Formula	Year (n)	1	2	3	4	5	6	7	8	9	10
	Asset cost	275000	275000	275000	275000	275000	275000	275000	275000	275000	275000
	%age depreciation	0.143	0.245	0.175	0.125	0.089	0.089	0.089	0.045	0.000	0.000
Asset cost*%age dep.	Depreciation (D)	39325	67375	48125	34375	24475	24475	24475	12375	0	0

NPV table is:

Formula	Year (n)	0	1	2	3	4	5	6	7	8	9	10
	Initial cost (IC)	275000
	EBITDA		90000	90000	90000	44000	44000	44000	44000	44000	44000	44000
	Less: Depreciation (D)		39325	67375	48125	34375	24475	24475	24475	12375	0	0
EBITDA-D	EBIT		50675	22625	41875	9625	19525	19525	19525	31625	44000	44000
35%*EBIT	Tax @ 35%		17736.25	7918.75	14656.25	3368.75	6833.75	6833.75	6833.75	11068.75	15400.00	15400.00
EBIT-Tax	Net income (NI)		32938.75	14706.25	27218.75	6256.25	12691.25	12691.25	12691.25	20556.25	28600.00	28600.00
	Add: Depreciation (D)		39325.00	67375.00	48125.00	34375.00	24475.00	24475.00	24475.00	12375.00	0.00	0.00
NI + D	Operating Cash Flow (OCF)		72263.75	82081.25	75343.75	40631.25	37166.25	37166.25	37166.25	32931.25	28600.00	28600.00
OCF - IC	Free Cash Flow (FCF)	-275000	72263.75	82081.25	75343.75	40631.25	37166.25	37166.25	37166.25	32931.25	28600.00	28600.00
1/(1+13%)^n	Discount factor @ 13%	1.000	0.885	0.783	0.693	0.613	0.543	0.480	0.425	0.376	0.333	0.295
FCF*Discount factor	PV of FCF	-275000	63950.22	64281.66	52217.00	24919.91	20172.35	17851.64	15797.91	12387.41	9520.51	8425.23
Sum of all PVs	NPV	14523.83

a). NPV = 14,523.83

b). Yes. Based on the NPV, the asset should be purchased as it has a positive NPV.