Consider the following investment opportunity:
Initial investment: 25,000
Cash Flow Year 1: 3,000
Cash Flow Year 2: 8,000
Cash Flow Year 3: 13,000
Cash Flow Year 4: 5,000
Cash Flow Year 5: 3,000
What is the CCA deduction (or expense) for year 2?
And the CCA tax shield for year 4?
The asset belongs to an asset class with a CCA depreciation rate of 25%. The company’s tax rate is 30%
Part A
CCA deduction for year 2 is the beginning value of the initial investment at year 2 * CCA depreciation rate.
The beginning value of the initial investment in year 2 is the
beginning value of the initial investment at year 1 - CCA
depreciation rate.
The beginning value of the initial investment at year 1=
25,000
CCA rate = 25%
Ending value of investment = 18,750
The beginning value of the initial investment at year 2 =
18,750
CCA rate = 25%
Therefore, CCA deduction for year 2 is 18,750 * 25% =
4687.5
Part B
Tax shield for year 4 = CCA expense * tax rate
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