Question
What is the present value of the CCA tax shields generated if a company purchases equipment...
What is the present value of the CCA tax shields generated if a company purchases equipment to be used in business operations for $380,000 and the equipment has a CCA rate of 30 percent? You intend to sell the equipment in year 8 for a salvage value of $8,000. The tax rate is 35 percent and the company uses a 10 percent discount rate. Select one: a. $92,537 b. $95,216 c. $91,273 d. $93,777 e. $94,236
Homework Answers
Answer #1
Formula for Present Value of CCA tax shields:
where, C = Cost of Capital = $380,000
T_c = Corporate Tax rate = 35%
d = CCA rate = 30%
r = Discount rate = 10%
S = salvage Value = $8000
n = no of years of projects = 8
Present Value of CCA tax shields = $ 95215.86 - $ 979.67
Present Value of CCA tax shields = $ 94236.19
So, Present Value of CCA tax shields is $ 94236
Hence, Option E
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