Evaluate a proposal to buy a new milling machine. The base price is $135,000 and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%.

The machine would require a $5,000 increase in net operating working capital (increased

inventory less increased accounts payable). There would be no effect on revenues, but pretax

labor costs would decline by $52,000 per year. The marginal tax rate is 35%, and the WACC

is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. Mention initial investment outlay for the machine for capital budgeting purposes, annual cash flows during Years 1, 2, and 3. What's the decision?