CASE CLARK UPHOLSTERY COMPANY*

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 € 2,000. 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 would be depreciated under MACRS using a 5-year recovery period. Renewing the machine