Question

In: Finance

Moore & Moore (MM) is considering the purchase of a new machine for $50,000, installed. MM...

Moore & Moore (MM) is considering the purchase of a new machine for $50,000, installed. MM will use the CCA method to depreciate the machine. This machine is included in CCA class 8 (20%). MM expects to sell the machine at the end of its 4-year operating life for $10,000. If MM’s marginal tax rate is 40%, what will be the present value of the CCA tax shield when it disposes of the machine at the end of Year 4? Assume that the relevant discount rate is 10%.

.

a.

$10,905

b.

$8,930

c.

$9,059

d.

$9,400

Solutions

Expert Solution

   Installed       50000  
   Sell machine       10000   40000
              
Years   OB   Rate   Dep.   CB
1   40000   0.2   8000   32000
2   32000   0.2   6400   25600
3   25600   0.2   5120   20480
4   20480   0.2   4096   16384
              
   4 th year end Value       16384  
              
   marginal tax rate       0.4  
              
   After tax        9830.4  
              
   10% Discounted       0.9091  
              
   Present Value       8936.82  


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