FORMULA APPROACH ONLY- No Excel or Calculator

You must evaluate a proposal to buy a new milling machine. The purchase price of the mulling machine, including shipping and installation coses, is $139,000, and the equpment wall be fully depreciated at the time of purchase. The machine would be sold after 3 years for $82,000. The machine would require a $3,500 increase in net operating workang capital (increased inventory less increased accounts payable). There woild be no effect on revenues, but pretax labor costs would decline by $51,000 per year. The marginal tax rate is 25%, and the WACC is 12%. Aso, the firm spent $4,500 last year investigating the feosibility of using the machine. a. How should the 54,500 spent last year be handed? 1. Last year's expenditure is considered a sunk cost and does not represent an incremental cash flow, Hence, it should not be included in the analysis. 11. The cost of research is an incremental cash flow and should be included in the analysis. III. Only the tax effect of the research expenses should be included in the analysis. IV. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's lefe. Hence, it should not be induded in the inital investment outlay. V. Last year's expenditure is considered an opportunity cost and does not represent an incremental cashiflow. Hence, it should not be induded in the analysis