In: Finance
Your firm needs new equipment that costs $80,000 and requires $20,000 in maintenance for each year of its three year life. After three years, the salvage value will be zero. The machine falls into the Class 10 equipment category (CCA rate 30%). Assume a tax rate of 34% and a discount rate of 10%. Compute the depreciation tax shield for year 3. *Note: A CCA table is required for this question. PVCCATS does not apply.
CCA Depreciation each year = Opening balance * Depreciation
rate
First year opening balance is cost that is $80000
Closing Balance = Opening balance - Depreciation
Year Opening Balance
Depreciation Closing Balance
1 80000 24000
56000
2 56000 16800
39200
3 39200 11760
27440
Depreciation tax shield in year 3 = Year 3 Depreciation*tax
rate
11760*34%
3998.4
So Depreciation tax shield in year 3 is
$3,998.40
Note: maintenance expense are not considered for Depreciation tax
shield