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You must evaluate a propasal to buy a new miling machine. The purchase price of the milling machine, including shipping and inatallation costs, is 1148 ,000, and the equipment wal be fully depreciated at the time of purchase. The machine would be sold after 3 years for $84,000. The machine would require a $4,000 increase in net operating working capital (increased liventory less increased accounts payable). There would be no effect on revenues, but pretax tabor costs would decine by $55, ooo per year. The marginal tax fate is 25%, and the WACC is 10\%s. Ase, the firm spent $4,500 last year investigating the feasbility of using the machine. a. How shauld the $4,500 spent last year be handled? 1. Last year's axpenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it sheuld not be induded in the analysis. II. Last year's expenditure is considered a sunk cost and does not represent an incremental cash fow. Hence, it should not be included in the analysis. IIt. The cost of research is an ineremental cash flow and should be included in the analysis. TV. Only the tax effect of the research expenses should be included in the analysis. W. Last year's expenditure should be treated as a terminal cash flow and deat with at the end of the project's Me. Hence, it should not be included in the initial investment outiay

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