You must evaluate a proposal to buy a new milling machine. The base price is $$108,000,$ and shipping and installation costs would add another $$15,000.$ The machine falls into the MACRS $3-$year class, and it would be sold after $3$ years for $$54,000.$ The applicable depreciation rates are $33\%,45\%,15\%,$ and $7\%.$ The machine would require a $$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 $$59,000$ per year. The marginal tax rate is $35\%,$ and the WACC is $12\%.$ Also, the firm spent $$5,000$ last year investigating the feasibility of using the machine.

How should the $$5,000$ spent last year be handled?

Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

The cost of research is an incremental cash flow and should be included in the analysis.

Only the tax effect of the research expenses should be included in the analysis.

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 the initial investment outlay.

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What is the initial investment outlay for the machine for capital budgeting purposes, that is$,$ what is the Year $0$ project cash flow? Round your answer to the nearest cent.

$

What are the project's annual cash flows during Years $1,2,$ and $3?$ Round your answer to the nearest cent. Do not round your intermediate calculations.

Year $1$ $

Year $2$ $

Year $3$ $

Should the machine be purchased?

$-$Select$-$