Question

ABC Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9%. The firm's tax rate is 34%. The CCA rate is 20% (Class 8).What is the present value of the depreciation tax shield?

Answer 1

Answer:
Caculation of Depreciation under CCA rate
Year	Opening BV	Rate	Depreciation	Closing BV
1	$               9,30,000	20%	$           93,000	$        8,37,000
2	$               8,37,000	20%	$       1,67,400	$        6,69,600
3	$               6,69,600	20%	$       1,33,920	$        5,35,680
4	$               5,35,680	20%	$       1,07,136	$        4,28,544
5	$               4,28,544	20%	$           85,709	$        3,42,835
Cacuation of Present value on Depreciation Tax Shield
Year	Depreciation	Tax Shield	PVF @ 5.94%	Present value
1	$                   93,000	$       31,620	0.9439	$            29,846
2	$               1,67,400	$       56,916	0.891	$            50,712
3	$               1,33,920	$       45,533	0.841	$            38,293
4	$               1,07,136	$       36,426	0.7938	$            28,915
5	$                   85,709	$       29,141	0.7493	$            21,835
				169602
The present value of tax shield on depreciation = $ 1,69,602