Question

In: Finance

Your firm needs new equipment that costs $80,000 and requires $20,000 in maintenance for each year...

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.

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Expert Solution

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              
              


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