Question

Compute the PV of the CCA Tax Shield given the following: Purchase Price of New Equipment...

Compute the PV of the CCA Tax Shield given the following:

Purchase Price of New Equipment = $60,000
CCA Rate for Equipment = 30%
Salvage Value of Equipment Received in 5 Years = $18,000 (not Present Value)
Required Rate of Return = 7%
Corporate Tax Rate = 30%

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Homework Answers

Answer #1

- Formula for Present Value of CCA tax shields:

where, C = Cost of Capital = $60,000

T_c = Corporate Tax rate = 30%

d = CCA rate = 30%

r = Discount rate = 7%

S = salvage Value = $18000

n no of years of projects = 5

PV CCA Tax Shield = 14117.2013 - 3121.7233

PV CCA Tax Shield = $ 10995.48

So, the the PV of the CCA Tax Shield is $10995.48

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