Bo Humphries, Chief Financial Officer of Clark Upholstery Company, Expects the Firm’s Net Operation Profit After Taxes for the Next 5 Years to Be as Shown in the Following Table. Year Net Operating Profit After Taxes 1 $

Bo Humphries, chief financial officer of Clark upholstery company, expects the firm’s net operation 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 asses, 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 $2,000 before taxes. 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 5-year usable life and would be depreciated under MACRS using a 5 year recovery period. Renewing the machine would result in the following projected revenues and expenses (excluding depreciation and interest): Year Revenue Expenses (excl. depr, and int.) 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 in net working capital of $15,000. 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 that cost $100,000 and requires installation cost 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 acquires 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...