Question

Burton Corp. currently has a fleet of vehicles for product delivery and repair. The vehicles were purchased four years prior for a capital cost of $17.25 mln and are the only assets that the firm has in CCA Class 16 (which has a CCA Rate of 30%). Senior management is currently evaluating the prospect of outsourcing delivery and repair services to an external third party, which would result in the firm selling its existing fleet of vehicles. BC’s marginal tax rate is 25%.   (WACC=8%）

For each of the following hypothetical resale values, determine the value of (if applicable): (i) Capital Gain, (ii) Terminal Loss, (iii) CCA Recapture, (iv) Total Tax Credit or Liability

a. The vehicles’ current undepreciated capital cost
b. $21.75 mln
c. $17.25 mln
d. $12.15 mln
e. $3.75 mln

Answer 1

		DEPRECIATION DURING 4 YEARS
		Figures in $ million
		Year	1	2	3	4
	A	Beginning Capital cost	$17.25	$12.08	$8.45	$5.92
	B	Depreciation Rate	30%	30%	30%	30%
	C=A*B	Depreciation amount	$5.18	$3.62	$2.54	$1.78
	D=A-C	Ending undepreciated capital	$12.08	$8.45	$5.92	$4.14
		Current undepreciated Capital Cost	$4.14
		a. Resale Value =$4.14 million
		(i)Capital Gain	$0
		(ii) Terminal Loss	$0
		(iii)CCA Recapture	$0
		(iv)Total Tax Credit or Liability	$0
		b. Resale Value =$21.75 million
		(i)Capital Gain	$4.50	(21.75-17.25)
		(ii) Terminal Loss	$0
		(iii)CCA Recapture	$13.11	(17.25-4.14)
		(iv)Total Tax Liability	$4.40	(25%*(21.75-4.14)
		c. Resale Value =$17.25 million
		(i)Capital Gain	$0.00
		(ii) Terminal Loss	$0
		(iii)CCA Recapture	$13.11	(17.25-4.14)
		(iv)Total Tax Liability	$3.28	(25%*13.11)
		d. Resale Value =$12.15 million
		(i)Capital Gain	$0.00
		(ii) Terminal Loss	$0
		(iii)CCA Recapture	$8.01	(12.15-4.14)
		(iv)Total Tax Liability	$2.00	(25%*8.01)
		e. Resale Value =$3.75 million
		(i)Capital Gain	$0.00
		(ii) Terminal Loss	$0.39	(4.14-3.75)
		(iii)CCA Recapture	$0.00	(12.15-4.14)
		(iv)Total Tax Credit	$0.10	(25%*0.39)