Whether the asset should be purchased by Universal Electronics or not. Introduction: Net present value (NPV): It is the difference between the PV (present value) of cash inflows and that of cash outflows. It is used in capital budgeting and planning investments to assess the benefit and losses of any project or investment.

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Chapter 12, Problem 29P

Summary Introduction

To calculate: Whether the asset should be purchased by Universal Electronics or not.

Introduction:

Net present value (NPV):

It is the difference between the PV (present value) of cash inflows and that of cash outflows. It is used in capital budgeting and planning investments to assess the benefit and losses of any project or investment.

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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. (Hint: It is not 10 years.) The asset will cost $285,000, and it will produce eamings 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 25 percent. Assume the cost of capital is 13 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Table 12-12. Use Appendix B 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.) Net present value b. Based on the net present value, should Universal Electronics purchase the asset? O Yes O No

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