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 operating profit after taxes for the next 5 years to be as shown in the following table Year Net operating profit after taxes $100,000 $150,000 $200,000 $250,000 $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 not operating profit after taxes) He estimates that at the end of 5 years, the existing machine can be sold to not $2.000 before taxes. Bo plans to use the following information to develop thellevant 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 would be depreciated under MACRS using a 5-year recovery period. Renewing the machine would result in the folowing projected revenues and expenses (excluding depreciation and interest) Year Revenue Expenses (Excl depreciation and interest $1,000,000 801,500 $1,175,000 884.200 3 $1,300 000 918.100 $1,425,000 943,100 $1,550,000 968 100 The renewed machine would result in an increased westment 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 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 acquires the machine, would be as follows Year Revenue Expenses (Excl depreciation and interest) 1 $1,000,000 2 $1,175,000 3 $1.300 000 014.000 $1,425,000 909900 764,500 839 800 $1.550.000 990 900 The new machine would result in an increased vestment in net working capital of $22,000 At the end of 5 years, the now machine could be sold to net $25.000 before taxes. The fem is subject to a 40% xx rate Assume a 9 percent discount rate As noted, the company uses MACRS depreciation To Do a. Calculate the initial investment associated with each of Clark Upholstery's alternatives b. Calculate the incremental operating cash inflows associated with each of Clark's alternatives (Note: Be sure to consider the depreciation in year 6) c. Calculate the terminal cash flow at the end of year 5 associated with each of Clark's alternatives d. Use your findings in parts (a), (b), and (e) to depict on a time line the relevant cash flows associated with each of Clark Upholstery's alternatives e. Solely on the basis of your comparison of their relevant cash flows, which alternative appears to be better? Why? a. Calculate the initial investment associated with each of Clark Upholstery's alternatives Calculate the initial investment associated with Alternative 1 below (Round to the nearest dollar) Initial Investment Installed cost of the renewed machine Cost of asset Installation costs Total cost of renewed machine After-tax proceeds from sale of old asset Proceeds from sale of old asset Tax on sale of old asset Total proceeds, sale of old asset Change in working capital Initial investment $ Alternative 1