Question

Your company is considering a project which will require the purchase of $815,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $296,000. Initial net working capital equal to 37.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 12.50% return on similar investments. The tax rate is 35%, and the project life is 5 years. There are no other operating expenses. If the equipment is in a 43.00% CCA class, what is the present value of the CCA tax shield?

	$169,163
	$173,614
	$178,066
	$182,518
	$186,969

Answer 1

Tax Shield is an allowable deduction from taxable income that results in a reduction of taxes owed. Tax shields differ between countries and are based on what deductions are eligible versus ineligible. The value of these shields depends on the effective tax rate for the corporation or individual (being subject to a higher rate increases the value of the deductions).

Common expenses that are deductible include depreciation, amortization, mortgage payments, and interest expense. There are cases where income can be lowered for a certain year due to previously unclaimed tax losses from prior years