You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $104,000,and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $43,000. The machine would require a $5,500increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costswould decline by $56,000 per year. The marginal tax rate is 25%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility ofusing the machine.a. How should the $4,500 spent last year be handled?I. 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.II. The cost of research is an incremental cash flow and should be included in the analysis.III. Only the tax effect of the research expenses should be included in the analysis.IV. 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 theinitial investment outlay.V. Last year's expenditure is considered an opportunity cost and does not repreent an incremental cash flow. Hence, it should not be included in theanalysis.-Select- +b. What is the initial investment outlay for the machine for capital budgeting purposes after the 100% bonus depreciation is considered, that is, what is the YearO project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.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 dollar.Year 1: $Year 2: $Year 3: $d. Should the machine be purchased?-Select-

Net present value is the difference between the present value of cash flow and initial investment. Net present value help in decision making.Part A Option 1 is correct Last year expense is considered as sunk cost and does not represent incremental cash flow. Hence should not be included in the analysis. $4500 is already incurred expenses and last year so that would be not included in cash flow calculations. Only current and future cash flow are considered only. Part B Initial investment= purchase price + increase in the working capital=$104000+5500=$109500 initial investment=$109500 Year 0 cash flow=Initial investment=-$109500Part C Annual benefits=$56000 Salvage value=$43000 Tax rate=25% Annual depreciation=purchase price -salvage valueeconomic life=104000-430003=$20333.333333 Annual cash flow=Cost saving (1-tax)+tax x depreciation Annual cash flow year 1=56000(1-0.25)+20333.333333 x 0.25=$40783.33 Annual cash year 2=$40783.33 Annual cash flow year 3=Annual cash flow +working capital +salvage value=5500+43000+47083.33=$95583.33 Annual cash flow year3=$95583.33Part D Present value of cash flow=cash flow(1+wacc)n=40783.331.08+40783.331.082+95583.331.083=$148606.99 NPV=Present value of cash flow- initial investment=148606.99-109500=$39106.99 NPV=$39106.99 As NPV is positive so machine should be purchased.