NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. Thebase price is $164,000, and shipping and installation costs wouldadd another $17,000. The machine falls into the MACRS 3-year class,and it would be sold after 3 years for $82,000. The applicabledepreciation rates are 33%, 45%, 15%, and 7%. The machine wouldrequire a $6,500 increase in net operating working capital(increased inventory less increased accounts payable). There wouldbe no effect on revenues, but pretax labor costs would decline by$51,000 per year. The marginal tax rate is 35%, and the WACC is12%. Also, the firm spent $5,000 last year investigating thefeasibility of using the machine. - How should the $5,000 spent last year be handled?
- Last year's expenditure is considered as a sunk cost and doesnot represent an incremental cash flow. Hence, it should not beincluded in the analysis.
- The cost of research is an incremental cash flow and should beincluded in the analysis.
- Only the tax effect of the research expenses should be includedin the analysis.
- Last year's expenditure should be treated as a terminal cashflow and dealt with at the end of the project's life. Hence, itshould not be included in the initial investment outlay.
- Last year's expenditure is considered as an opportunity costand does not represent an incremental cash flow. Hence, it shouldnot be included in the analysis.
-Select-IIIIIIIVVItem 1 What is the initial investment outlay for the machine forcapital budgeting purposes, that is, what is the Year 0 projectcash flow? Round your answer to the nearest cent.
$ What are the project's annual cash flows during Years 1, 2, and3? Round your answer to the nearest cent. Do not round yourintermediate calculations. Year 1 $ Year 2 $ Year 3 $ - Should the machine be purchased?
-Select-YesNoItem 6
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