You are evaluating a proposal to buy a new milling machine. The base price is $108,000 and shipping and installation costs would add another $12,500. The machine would be sold after 3 years for $65,000. The machine would require a $5,500 increase in net working capital (inventory). There would be revenues of $44,000 per year and cost of $10,000 per year. The company's tax rate is 35%, and the cost of capital (WACC) is 12%. Also the firm spent $15,000 last year investigating the feasability of using the machine. The opportunity cost of purchasing the machine is $5,000.
A) How should the $15,000 spent last year be handled?
B) What are the cash flows for each year - Initial cash flow. Operating cash flow and terminal cash flow?
C) Should the machine be purchased?