Q$3.$ a$)$ The administrator of a pension fund wants to evaluate the performance of four portfolio managers.The CC Limited is evaluating the proposed acquisition of a new milling

machine. The machine's base price is ${?}^5,400,000,$ and it would cost

another ${?}^{-}600,000$ to modify it for special use by your firm. The machine

falls into $40\%$ tax rate at WDV and it would be sold after $3$ years for

$-3,250,000.$ The machine would require an increase in net working capital

$($inventory$)$ of $\text{'}275,000.$ The milling machine would have no effect on

revenues, but it is expected to save the firm ${?}^{}2,200,000$ per year in before$-$

tax operating costs, mainly labour. Campbell's marginal tax rate is $30$

percent.

a$.$ What is the net cost of the machine for capital budgeting purposes?

$($That is$,$ what is the Year $0$ net cash flow?$)$

b$.$ What are the net operating cash flow in Years $1,2$ and $3?$

c$.$ What is the terminal year cash flow?

d$.$ If the project's cost of capital is $12$ percent, should the machine be

purchased?

Each portfolio manager invests only in U$.$S$.$ common stocks. Assume that during the most recent $5-$

year period, the average annual total rate of return including dividends on the S&P $500$ was $14\%,$ and

the average nominal rate of return including dividends on the S&P $500$ was $14\%,$ and the average

nominal rate of return on government treasury bills was $8\%.$ The following shows risk and return

measures for each portfolio:

Using various portfolio evaluation measures, how do the portfolio managers perform relative to each

other?