Depreciation and New Machine

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Developing and 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 operating profit after taxes for the next 5 years to be as shown in the following table. Year Net operating profit 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 operating cash inflows equal its net operating profit after taxes.) He estimates that at the end of 5 years, the existing machine can be sold to net $2000 before taxes. Bo plans to use the following information to develop the relevant cash flows for each of the alternatives. Alternative 2: Replace the existing machine with a new machine that costs $100,000 and requires installation costs of $10,000. The new machine would have a 5-year usable life and would be depreciated under MACRS using a 5-year recovery period. The firm’s projected revenues and expenses (excluding depreciation and interest), if it requires the machine, would be as follows: Year RevenueExpenses

(Excl, depr, and int.)
21,175,000 839,800
31,130,000 914,900
41,425,000 989,900
51,550,000 998,900

The new machine would result in an increased...
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