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 3 years ago

Calculate the PV CCA Tax Shield for the following asset. A machine that has a 10...

Calculate the PV CCA Tax Shield for the following asset. A machine that has a 10 year useful life and a purchase price of 100,000. The CCA rate on the machine is 30% and the company is operating in a 35% tax bracket. Your company typically uses a 12% discount rate on all of its potential investments. At the end of its useful life, the machine will have a salvage value of $0.00.

Find the present value of the depreciation tax shield and the present value of the after-tax salvage value

Find the present value of the depreciation tax shield and the present value of the after-tax salvage value, if the annual depreciation is $6,000 for 5 years, the after-tax salvage value is $9,000, and the tax rate is 40%. The required rate of return is 10%. The lease lasts for 5 years. Present value of depreciation tax shield = $9,098 Present value of after-tax salvage value = $34,117 Present value of depreciation tax shield = $22,744 Present value of after-tax salvage value...

PRESENT VALUE OF AN ANNUITY - (a) What is the present value of an asset that...

PRESENT VALUE OF AN ANNUITY - (a) What is the present value of an asset that pays $10,000 per year at the end of the next four years if the appropriate discount rate is 5 percent? What total return would you earn if you bought this asset and it paid its expected cash flows on time each year for the next four years? Prove that you earned the same return that you would have, had you put your money in...

the major benefit of debt financing – the tax shield - is easy to calculate, many...

the major benefit of debt financing – the tax shield - is easy to calculate, many of the indirect costs of debt financing can be quite subtle and difficult to quantify. They arise, among other reasons, due to the loss of employees, fire sales of assets, and loss of customers in highly levered firms. Explain how these losses arise and which kind of companies are more affected; examples are going to be appreciated.

Although the major benefit of debt financing – the tax shield - is easy to calculate,...

Although the major benefit of debt financing – the tax shield - is easy to calculate, many of the indirect costs of debt financing can be quite subtle and difficult to quantify. They arise, among other reasons, due to the loss of employees, fire sales of assets, and loss of customers in highly levered firms. Explain how these losses arise and which kind of companies are more affected; examples are going to be appreciated.

When you calculate the present value of an asset, for example a bond, you are calculating...

When you calculate the present value of an asset, for example a bond, you are calculating _____. maximum price you would pay for the asset minimumm price you would pay for the asset future value of the asset insurance premiums

Describe in general what tax shield is ?

Present value For the case shown in the following table, calculate the present value of the...

Present value For the case shown in the following table, calculate the present value of the cash flow, discounting at the rate given,and assuming that the cash flow is received at the end of the period noted. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Single cash flow- $148,000 discount rate- 13% end of period (years) - 7

1)Under the net-present-value method, if the cost of the asset is less than the present value...

1)Under the net-present-value method, if the cost of the asset is less than the present value of the future cash flows, the: investment's expected return is greater than the firm's cost of capital firm's cost of capital is greater than the rate of return on assets net-present-value is negative investment should not be made 2) A capital investment generates a satisfactory rate of return when its return is: Greater than the internal rate of return Less than the cost of...

Net present value Using a cost of capital of 11%, calculate the net present value for...

Net present value Using a cost of capital of 11%, calculate the net present value for the project shown in the following table and indicate whether it is acceptable, Initial investment (CF 0CF0) negative 1 comma 143 comma 000−1,143,000 Year (t) Cash inflows (CF Subscript tCFt) 1 $81,000 2 $138,000 3 $193,000 4 $258,000 5 $311,000 6 $377,000 7 $270,000 8 $98,000 9 $45,000 10 $29,000 The net present value (NPV) of the project is _____$ (Round to the nearest...

Question