Reference no: EM132524037
Question - Custom Electronics, Inc. purchased a $300,000 machine to manufacture a specialty tap for electrical equipment. This tap is in high demand and Custom Electronics can sell all it can manufacture in the next 5 years. The machine is expected to have a 5-year useful life and the company assumes no salvage value for straight-line depreciation calculations. Custom Electronics wants a 12% return in evaluating capital investments. The following cash flow information for the next five years is as follows:
Year 1: Revenues $90,000; Cash operating expenses $40,000
Year 2: Revenues $180,000; Cash operating expenses $100,000
Year 3: Revenues $200,000; Cash operating expenses $120,000
Year 4: Revenues $200,000; Cash operating expenses $130,000
Year 5: Revenues $440,000; Cash operating expenses $150,000
Year 6: Revenues $500,000; Cash operating expenses $200,000
At the end of the 5th year, Custom Electronics expects to be able to sell the machine for $5,000.
Depreciation IS NOT included in the cash operating expenses listed above.
Required -
1. Compute the NPV of the investment, before taxes.
2. Compute the NPV of the investment, after taxes, assuming a 40% tax rate.