CAPITAL BUDGETING PROBLEM Allionce Lights Replocement Project Alliance Uights, a manufacturer of halogen bulbs, is considering replacing its machinery. The old equipment was purchased for $1,000,000 two years ago. The company uses straight-fine depreciation with a usefull life of 8 years. The new equipment is much more efficient and costs $1,500,000; it has a useful ife of 6 years. With the new machine, production expenses will fall by 100 due to lower maintenance costs. Alliance will use the straight line depreciation method (depreciated to zero) for tax purposes. The old machine can be sold for $600,000 now of $50,000 at the end of its useful life. The new equipment will be sold for $100,000 at the end of its useful iffe. Sales of halogen bulbs are expected to be 1,000,000 units the first year and increase by 100,000 unity/vear for the next 5 years. The sale price will be $3/ oulb. The production expenses for the old machine were $1.80/ bulb. Selling and administrative expenses account for another 50.25/bu b. Allance's tax rate is 40K. Since there will be fewer machine breakdowns, the necessary inventory level will fall by 40,000 . A) The production manager calls you on the phose and reminds you of the $10,000 that was spent last year on a feasibility study to determine whether or not to replace the old mactine. He argues that this 510,000 should be included in the project's initial investment. Do you agree with him or not, and whtr? we agnoe that the 1000 showld be included in the initral mreitment