su must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $109,000, nd the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $45,000. The machine would requare a 10,000 increase in net operating wothing capital (increased inventory lens increased accounts payable). There would be no effect on revenues, but pretax abor costs would decline by $54,000 per year. The marginal tax rate is 25%, and the WACC is 12%. Also, the firm spent $4,500 last year investigating the. easibility of using the machine. a. How should the $4,500 spent last year be handled? 1. Only the tax effect of the research expenses should be included in the analysis. 11. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial imvestment outlay. 111. Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it should not be Included in the arialysis. IV. Last year's expend ture is considered a sunk cost and does not represent an incrernental cash flow. Hence, it should not be induded in the analysia. V. The cost of research is an incremental cash flow and should be included in the analysis. b. What is the initial investment outay for the machine for capial budgeting purposes after the 100% bonus depreciation is considered, that is, what is the Year 0 orolect cath flow? Enter your answer as a positive value. Round your andwer to the nearest dellar. \& c. What are the project's annual cash flows during vears 1, 2, and 37 Do not round intermediate calculations. Round your answers to the nearest dolfar, Year it 5 Year 2 is Year 3:4