Question

# Alpha Corporation has just invested \$1,200,000 in new equipment which has a useful life of 6...

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

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