Developing Relevant Cash Flows for Clark Upholstery Companyâ€™s Machine Renewal or Replacement Decision Bo Humphries, chief financial officer of Clark Upholstery Company, expects the firmâ€™s net profits after taxes for the next 5 years to be as shown in the following table. Year Net profits after taxes 1 $100,000 2 $150,000 3 $200,000 4 $250,000 5 $320,000 Bo is beginning to develop the relevant cash flows needed to analyze whether to renew or replace Clarkâ€™s only depreciable asset, a machine that originally cost $30,000, has a current book value of zero, and can now be sold for $20,000. (Note: Because the firmâ€™s only depreciable asset is fully depreciated—its book value is zero—its expected net profits after taxes equal its operating cash inflows.) He estimates that at the end of 5 years. Bo plans to use the following information to develop the relevant cash flows for each of the alternatives. Alternative 1 Renew the existing machine at a total depreciable cost of $90,000. The renewed machine would have a 5-year usable life and depreciated under MACRS using a 5-year recovery period. Renewing the machine would result in the following projected revenues and expenses (excluding depreciation): Year Revenue Expenses (excluding depreciation) 1 $1,000,000 $801,500 2 $1,175,000 $884,200 3 $1,300,000 $918,100 4 $1,425,000 $943,100 5 $1,550,000 $968,100 The renewed machine would result in an increased investment of $15,000 in net working capital. At the end of 5 years, the machine could be sold to net $8,000 before taxes. Alternative 2 Replace the existing machine with a new machine costing $100,000 and requiring installation costs of $10,000. The new machine would have a 5-year usable life and be depreciated under MACRS using a 5-year recovery period. The firmâ€™s projected revenues and expenses (excluding depreciation), if it acquires the machine, would be as follows: Year Revenue Expenses(excluding depreciation) 1 $1,000,000 $764,500 2 $1,175,000 $839,800 3 $1,300,000 $914,900 4 $1,425,000 $989,900 5 $1,550,000 $998,900 The new machine would result in an increased investment of $22,000 in net working capital. At the end of 5 years, the new machine could be sold to net $25,000 before taxes. The weighted average cost of capital is 10%. Find the NPV, IRR, MIRR, payback and discounted payback for both alternatives. Which alternative should be selected? Explain.