Shrieves Casting Company is considering adding a new line to itsproduct mix, and the capital budgeting analysis is being conductedby Sidney Johnson, a recently graduated MBA. The production linewould be set up in unused space in the main plant. The machinery’sinvoice price would be approximately $200,000, another $10,000 inshipping charges would be required, and it would cost an additional$30,000 to install the equip- ment. The machinery has an economiclife of 4 years, and Shrieves has obtained a special tax rulingthat places the equipment in the MACRS 3-year class. The machineryis expected to have a salvage value of $25,000 after 4 years ofuse. The new line would generate incremental sales of 1,250 unitsper year for 4 years at an incremental cost of $100 per unit in thefirst year, excluding depreciation. Each unit can be sold for $200in the first year. The sales price and cost are both expected toincrease by 3% per year due to inflation. Further, to handle thenew line, the firm’s net working capital would have to increase byan amount equal to 12% of sales revenues. The firm’s tax rate is40%, and its overall weighted average cost of capital, which is therisk-adjusted cost of capital for an average project (r), is 10%.a. Define “incremental cash flow.” (1) Should you subtract interestexpense or dividends when calculating project cash flow? (2)Suppose the firm spent $100,000 last year to rehabilitate theproduction line site. Should this be included in the analysis?Explain. (3) Now assume the plant space could be leased out toanother firm at $25,000 per year. Should this be included in theanalysis? If so, how? (4) Finally, assume that the new product lineis expected to decrease sales of the firm’s other lines by $50,000per year. Should this be considered in the analysis? If so,how?