Question

Spherical Manufacturing recently spent $ 10 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 25 % and​ Spherical's marginal corporate tax rate is 33 %.

a. What are the annual CCA deductions associated with this equipment for the first five​ years?

b. What are the annual CCA tax shields for the first five​ years?

c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 8 % per​ year?

d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is 8 % per​ year?

e. How might your answer to part​ (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five​ years?

Answer 1

		Ans a	Ans b.
	a	b	c	d
Year	Opening Asset Value (written Down)	CCA Amount @25%	Tax Shield @33% =CCA Amount *33%	PV Fcator @8% =1/1.08^n	PV of CCA Tax shields =c*d
1	$           10,000,000	$ 2,500,000.0	$                         825,000.00	0.926	$         763,950
2	$             7,500,000	$ 1,875,000.0	$                         618,750.00	0.857	$         530,269
3	$             5,625,000	$ 1,406,250.0	$                         464,062.50	0.794	$         368,466
4	$             4,218,750	$ 1,054,687.5	$                         348,046.88	0.735	$         255,814
5	$             3,164,063	$    791,015.6	$                         261,035.16	0.681	$         177,765
	Total				$     2,096,264	Ans c

Ans d.

If the asset is never sold, the CCA deductions will continue on the written down vaue  . If we extend the CCA calculations , by the end of 62 years the CCA deductions become negligible and the total PV CCA tax shields becomes $2500413.

Showing some initial and final rows of calculation below.

		Ans a	Ans b.
	a	b	c	d
Year	Opening Asset Value (written Down)	CCA Amount @25%	Tax Shield @33% =CCA Amount *33%	PV Fcator @8% =1/1.08^n	PV of CCA Tax shields =c*d
1	$           10,000,000	$ 2,500,000.0	$                         825,000.00	0.926	$         763,950
2	$             7,500,000	$ 1,875,000.0	$                         618,750.00	0.857	$         530,269
3	$             5,625,000	$ 1,406,250.0	$                         464,062.50	0.794	$         368,466

59	$                             1	$                0.1	$                                     0.05	0.011	$        0.00051
60	$                       0.43	$              0.11	$                                     0.04	0.010	$        0.00035
61	$                       0.32	$              0.08	$                                     0.03	0.009	$        0.00024
62	$                       0.24	$              0.06	$                                     0.02	0.008	$        0.00016
	Total				$     2,500,413