Calculate the present value of the CCA Tax Shield for an asset costing $ 200,000 ,...

Calculate the present value of the CCA Tax Shield for an asset costing $ 200,000 , CCA Rate of 25 % Salvage Value of $ 8000 , tax rate of 35 % a cost of capital discount rate of 12 % , and a 20 year term ( or life )

A$ 44,567

B$ 56,717

C$40,954

D$42,522

it means calital cost allowance

Expert Solution

Cost of Capital =k	12%
Assuming Half year convention for 1st year
Asset value =C	200,000.00
CCA Rate =d=25%
Year 1 CCA=200,000*25%/2=	25,000.00
UCC at Year 1 end= UCC1=200,000-25000=175,000
Asset Life =n=20 years
Tax rate =T=35%
UCC at year 20 end =UCC1(1-d)^(n-1)=175000(1-25%)^19	739.95
Salvage value at year 20 end =	8,000.00
Capital Gain /CCA recapture	7,260.05
Tax on CCA recapture =7260.05*35%	2,541.02
PV of CCA recapture =2541.02/1.12^20=	263.43

Total CCA tax shield w/o considering Salvage
related recapture =(CdT)/(k+d)(1+0.5k)/(1+k)
=(200,00025%35%)/(12%+25%)(1+0.512%)/(1+12%)
=$44763.51
Less : PV of CCAt recapture =	$ 263.43

Net CCA Tax shield =$44763.51-263.43=$44,500.09

Ans is close to option $44,567

So correct option is A . $44,567.

jeff jeffy answered 2 years ago

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