Question

A project requires initial asset investment of $1 million. The asset will last for 8 years, and will be depreciated for tax purposes at the CCA rate of 30%. The required return on this project is 16%, and the marginal corporate tax rate is 36%. Assuming that the asset will have a salvage value of $50,000 at the end of Year 8, what is the present value of the CCA tax shields from this project?

Answer 1

Given : Asset depreciable value =$1M, Life 8 Years, CCA Rate 30%

Using CCA rate on the written down balance of the asset.

			a				b	c	d
Year	Opening Asset Value (written Down)	CCA Amount @30%	Tax Shield @36% =CCA Amount *36%	UCC at Year 8 end	Salvage	Terminal Capital Loss=UCC-salvage	Tax Shield on Terminal Capital Loss	Total Tax Shield on CCA =a+b	PV Fcator @16% =1/1.16^n	PV of CCA Tax shields =c*d
1	$    1,000,000	$ 300,000.0	$ 108,000.00					$       108,000	0.862	$       93,096
2	$        700,000	$ 210,000.0	$    75,600.00					$         75,600	0.743	$       56,171
3	$        490,000	$ 147,000.0	$    52,920.00					$         52,920	0.641	$       33,922
4	$        343,000	$ 102,900.0	$    37,044.00					$         37,044	0.552	$       20,448
5	$        240,100	$   72,030.0	$    25,930.80					$         25,931	0.476	$       12,343
6	$        168,070	$   50,421.0	$    18,151.56					$         18,152	0.410	$         7,442
7	$        117,649	$   35,294.7	$    12,706.09					$         12,706	0.354	$         4,498
8	$          82,354	$   24,706.3	$      8,894.26	$    57,648	$     50,000	$      7,648	$          2,753.28	$         11,648	0.305	$         3,553
	Total	$ 942,352.0								$     231,472
		So Present Value of CCA Tax shields is $231,472