7-31. The CFO of Acme Manufacturing is considering the purchase of a special diamond-tipped cutting tool.

This tool has the following initial costs to put into service.

Acme will use cash to pay for all of these expenses, some of which was borrowed on a long-term credit line with the local bank. (7.9)

Purchase price $320,000 Delivery charge $6,000 Installation cost $29,000 Employee training $10,000 The CFO has been directed by Acme to use the MACRS depreciation method with a GDS recovery period of five years. Other relevant factors are given in the following table.

Increased annual revenue $120,000 Increased annual expenses $30,000 After-tax MARR 10%

Effective tax rate 37%

Sales price of the tool in yr 5 $20,000 Projected salvage value in yr 5 $10,000 Fill in the blank cells in the table below. Assume the tool is sold in the fifth year for $20,000. (Enter numbers to the nearest dollars.) Is this a good investment? Support your answer.

EOY BTCF Depreciation Taxable Income ATCF Income Tax (37%)

0 1 $90,000 −$6,290 2 $90,000 −$26,800 $99,916 3 $90,000 −$7,370 4 $90,000 5 $90,000 $68,976 −$25,521 5 $20,000 $0