Wallaroo Company is considering the purchase of a new lathe machine and must decide between two possible machines. It is expected that it will be a repeated investment into the foreseeable future. The relevant data associated with each machine is shown below.

	Machine A	Machine B
Initial cost	$300 000	$400 000
Installation cost	$25 000	$32 000
Life (years)	5	8
Increase in annual revenues	$180 000	$240 000
Increase in annual expenses	$95 000	$160 000
Salvage value	$30 000	$55 000

Required

Part (a) Ignoring all tax implications of this decision and assuming the company has a required rate of return of 10 per cent, which machine should the company select? Explain why.

[8 marks]

Part (b) What is opportunity cost in the context of capital budgeting and why should it be taken into account? Give an example explaining how it is an opportunity cost.

[4 marks]

Part (c) Why might FCF in the terminal year of a projects life differ from FCF in the other years?

[4 marks]

[Total for question 3 = 16 marks]