You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, 5$114,000, and the epuipment mill be fully depreciated at the time of purchase. The machine would be sold after 3 years for $78,000. The machine would require an $8,500 increase in net operating working capital (increased invemtory 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 feasiblity of using the machine. a. How should the 54,500 spent last year be handled? 1. Last year's expenditure is consudered an opportunity cost and does not represent an incremerital cash flow, Hence, if should not be included in the analysis. II. 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: 111. The cost of reseach is an inciemental cash flow and should be included in the analysas. IV. Only the tax effect of the research expenses should be included in the analyss. V. Last year's expenditure should be treated as a termal cash flow and deart with at the end of the propoct's life, Hence, it should not be included in the inital investment outlay