Problem:
You must evaluate a proposed spectrometer for the R&D department. The base price is $170,000, and it would cost another $42,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $68,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $59,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.
Requirement:
Question 1: What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow?
Note: Provide support for your underlying principle.