ou must tvaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including stipping and instatation costs, is 51186 , 000, and the quipment will be fully depreciated at the time of purchase. The mactine nould be sold after 3 years for $100,000, The machine would require a $5, o00 increase in et operating working capital (iocreased inventory less increased accounts payable), There would be no effect on revenues, but pretax labor conts would decine by. 549,000 per yeac. The marginal tax rate is 25\%, and tie Wacc is 06. Aso, the firm scent 54,500 lost yeor investigating the feassality of using the mach ine. a. How thovid the $4,500 spent lavt year be handied? 1. Last vears expenditure should be treated as a terminal cash fiow and dealt with at the end of the projects life. Hence, it shouid not be included in the initial inveltment outiay. II. Lavt year's expendityre is considered on opportunify cost and does not represent an ineremental cash fowi. Hence, it thould not be included in the aralyis IIt. Last year's expend ture is considered a tunk cost and does not represent an incremental cast flow. Hence, it should not be inclided in the TV. The cost of tesearch is an incremental cash flow and should be included in the analysis. V. Only the tak elfect of the relearch expenses should be included in the analytis. b. Whyt is the initial investinent ovtlay for the machine for captal budgeting purposes after the 10on, bonus deprecution is considered, that is, what is the Yesc o orolict cash flow? Lnter vour anywer as a positive value. flound your anteser to the nearest doliac. 3) c. What are the projecte annual cash flows durne Years 1,2 and 37 Don not round intermedate calculstions flound your answers to the nesrest dollar Teat 1:5 Year 2:4 Tear 3:5 di. Shemild tha machine be purchased