Question

A piece of machinery was bought for $200,000. It has an economic life of 4 years, and is in the Class 8 with a CCA of 20%. It's expected salvage value after 4 years of use is $25,000.

A)What is the depreciation on this piece of machinery?

B) What is the present value of the CCA tax shield?

Answer 1

A)

Depreciation on this piece of machinery in a different year:

Year 1 : 200000 * 20% = 40000

Year 2 : (200000 – 40000) * 20% = 32000

Year 3 : (200000 – 40000 - 32000) * 20% = 25600

Year 4: (200000 – 40000 – 32000 - 25600) * 20% = 20480

B)

Now, this is interesting; it is not possible to find out present value if CCA tax shield if the proper discounting rate and income tax rate is not given.

Annual Tax Shield is Annual Depreciation * Applicable Income tax rate.

Suppose Tax Rate is T and the discounting rate is R

Then, Present value if CCA tax shield = (40000 * T) / (1+R)^1 + (32000 * T) / (1+R)^2 + (25600 * T) / (1+R)^3 + (40000 * T) / (1+R)^4

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