You must evaluate a proposal to buy a new milling machine. The base price is $106,000, and shipping and installation costs would add another $16,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $47,700. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $8,000 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 35%, and the WACC is 12%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. a. How should the $4,500 spent last year be handled? L. Only the tax effect of the research expenses should be included in the analysis. II. 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 III. Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it should not be IV. Last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, It should not be included in V. The cost of research is an incremental cash flow and should be included in the analysis. included in the analysis. the analysis. -Select- b. What is the initial Investment outlay for the machine for capital budgeting purposes, that is what is the Year O project cash flow? Enter your answer as a positive value. Round your answer to the nearest cent. (e. What are the project's annual cash flown during Years 1, 2, and 3? Do not round Intermediate calculations. Round your answers to the nearest cent. Year 115 Year 25 Year 3:5 d. Should the machine be purchased? Select You must evaluate a proposal to buy a new milling machine. The base price is $105,000, and shipping and installation costs would add another $16,000. The machine falls into the MACRS 3-year dass, and it would be sold after 3 years for $47,700. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $8,000 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 35%, and the WACC is 12%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine 2. 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 II. 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 III. 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 IV. 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. V. The cost of research is an incremental cash flow and should be included in the analysis, Investment outlay -Select- b. What is the initial investment outlay for the machine for capital budgeting purposes, that is what is the Year O project cash flow? Enter your answer as a positive value, Round your answer to the nearest cent 5 c. 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 cent Year 16 Year 25 Year 3:5 d. Should the machine be purchased -Select
