Question

A construction company bought a new bulldozer for $220,000, which has a CCA rate of 30%. (Firm uses the 50% rule). The expected annual revenues and costs that will be created by the machine are:

Operating revenue (OR) = $324,000

Operating cost (OC) = $96,000

If the firm’s corporate (marginal) tax rate is 27%, find the net cash flow for Years 0, 1 and 2.

(Write your answer in a table format)

Answer 1

The initial investment is $220000 and the CCA rate is 30%.
However, it is mentioned that the company uses 50% rate.

Year 0
Cash Flow = -220000

Year 1
Operating Revenue - Operating Cost
324000 - 96000 = 228000

CCA allowance at 30%
220000 * 0.3 = 66000
Taxable = 228000 - 66000 = 162000
Net = 162000 * (1 - 0.27) = 118260

If the CCA is 50%
220000 * 0.5 = 110000
Taxable = 228000 - 110000 = 118000
118000 * (1-0.27) = 86140

Year	Investment	Revenue	Cost	Operating	Dep. @ 30%	Taxable	CF after Tax
0	-220000
1		324000	-96000.00	228000.00	66000	162000	118260
2		324000	-96000.00	228000.00	66000	162000	118260
Year	Investment	Revenue	Cost	Operating	Dep. @ 50%	Taxable	CF after Tax
0	-220000
1		324000	-96000.00	228000.00	110000	118000	86140
2		324000	-96000.00	228000.00	110000	118000	86140