Question

Alpha Corporation has just invested $1,200,000 in new equipment which has a useful life of 6 years and a salvage value of $200,000. The Corporation has a tax rate of 40% and the equipment falls into a 30% CCA class and the half-year rule applies. The new equipment would result in annual pre-tax savings of $350,000 in each of the 6 years starting in Year 1. The equipment requires an investment in working capital of $60,000 at t=0 which is fully recovered in Year 6. The company’s cost of capital is 12%. What is the present value of the CCA tax shields over the project’s life?

Select one:

a. $147,770

b. $258,597

c. $184,712

d. $295,539

e. $221,767

Answer 1

Option (d) is correct answer

The formulae can be applied as under

Therefore, the above sum will be solved as under :

=(1200000*0.4*0.3)*(1+0.5*0.12)	X	=0.4*0.3*200000
=(0.12+0.3)*(1.12)	=(0.12+0.3)*(1.12)^6

1,52,640.00	X	24,000.00
0.4704	0.8290

3,24,489.80

x

28,950.35

=

2,95,539