You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $103,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $46,000. The machine would require a $4,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $60,000 per year. The marginal tax rate is 25%, and the WACC is 10%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine.

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. 2- 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 investment outlay. 3- 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 analysis. 4- 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. 5- The cost of research is an incremental cash flow and should be included in the analysis.

I believe it's the last one.... 5

What is the initial investment outlay for the machine for capital budgeting purposes after the 100% bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. $

What are the project's annual cash flows during Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1: $

Year 2: $

Year 3: $

Should the machine be purchased?

Yes or no