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Unformatted text preview: lternative. CHAPTER 8 CHAPTER 8 CASE Capital Budgeting Cash Flows 391 Developing Relevant Cash Flows for Clark Upholstery
Company’s Machine Renewal or Replacement Decision B o Humphries, chief financial officer of Clark Upholstery Company, expects
the firm’s net profits after taxes for the next 5 years to be as shown in the
Year Net profits 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 net profits after taxes equal its operating
cash inflows.) 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 $...
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This document was uploaded on 01/19/2014.
- Fall '13