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
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 Revenue Expenses
(Excl, depr, and int.)
1 $1,000,000 $764,500
2 1,175,000 839,800
3 1,130,000 914,900
4 1,425,000 989,900
5 1,550,000 998,900
The new machine would result in an increased