years to be as shown in the following table. Year Net profits

Developing Relevant Cash Flows for Clark Upholstery Company’s Machine Renewal or Replacement Decision Bo Humphries, chief financial officer of Clark Upholstery Company, expects the firm’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 Clark’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 firm’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 firm’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.

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