Chapter 9 - Capital Budgeting Practice Problem \#1 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 with no salvage value. 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; Operating expenses $40,000 Year 2: Revenues $180,000; Operating expenses $100,000 Year 3: Revenues $200,000; Operating expenses $120,000 Year 4: Revenues $200,000; Operating expenses $130,000 Year 5: Revenues $440,000; Operating expenses $150,000 Year 6: Revenues $500,000; 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 calculated on a straight-line basis over the 5 -year period. Depreciation IS NOT included in the cash operating expenses listed above. 1. Compute the NPV of the investment before taxes. 2. Compute the NPV of the investment after taxes. (assume a 40% tax rate) Chapter 9 - Capital Budgeting Practice Problem \#1 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 with no salvage value. 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; Operating expenses $40,000 Year 2: Revenues $180,000; Operating expenses $100,000 Year 3: Revenues $200,000; Operating expenses $120,000 Year 4: Revenues $200,000; Operating expenses $130,000 Year 5: Revenues $440,000; Operating expenses $150,000 Year 6: Revenues $500,000; 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 calculated on a straight-line basis over the 5 -year period. Depreciation IS NOT included in the cash operating expenses listed above. 1. Compute the NPV of the investment before taxes. 2. Compute the NPV of the investment after taxes. (assume a 40% tax rate)