Question

Spherical Manufacturing recently spent

$ 12$12

million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of

45 %45%

and​ Spherical's marginal corporate tax rate is

35 %35%.

a. What are the annual CCA deductions associated with this equipment for the first five​ years?

b. What are the annual CCA tax shields for the first five​ years?

c. What is the present value of the first five CCA tax shields if the appropriate discount rate is

10 %10%

per​ year?d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is

10 %10%

per​ year?

e. How might your answer to part​ (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five​ years?

a. What are the annual CCA deductions associated with this equipment for the first five​ years?

The CCA deduction for year 1 is

​$

​(Round to the nearest​ dollar.)The CCA deduction for year 2 is

​$

​(Round to the nearest​ dollar.)The CCA deduction for year 3 is

​$

​(Round to the nearest​ dollar.)The CCA deduction for year 4 is

​$

​(Round to the nearest​ dollar.)The CCA deduction for year 5 is

​$

​(Round to the nearest​ dollar.)

b. What are the annual CCA tax shields for the first five​ years?

The CCA tax shield for year 1 is

​$

​(Round to the nearest​ dollar.)The CCA tax shield for year 2 is

​$

​(Round to the nearest​ dollar.)The CCA tax shield for year 3 is

​$

​(Round to the nearest​ dollar.)The CCA tax shield for year 4 is

​$

​(Round to the nearest​ dollar.)The CCA tax shield for year 5 is

​$

​(Round to the nearest​ dollar.)c. What is the present value of the first five CCA tax shields if the appropriate discount rate is

10 %10%

per​ year?The present value of the first five CCA tax shields is

​$

​(Round to the nearest​ dollar.)d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is

10 %10%

per​ year?The present value of all the CCA tax shields is

​$

​ (Round to the nearest​ dollar.)

e. How might your answer to part​ (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five​ years?  ​(Select the best choice​ below)

A.

If the marginal corporate tax rate increases over the next five​ years, the PV of the CCA tax shields will be the same as what is calculated in part​ (d).

B.

If the marginal corporate tax rate increases over the next five​ years, the PV of the CCA tax shields will be higher than what is calculated in part​ (d).

C.

If the marginal corporate tax rate increases over the next five​ years, the PV of the CCA tax shields will be lower than what is calculated in part​ (d).

Answer 1

D. PV of all CCA tax shields = Year 1 Tax Shield / (Discount Rate - Growth Rate)

PV of all CCA tax shields = $1890000 / (10% - (-45%))

PV of all CCA tax shields = $1890000 / 55%

PV of all CCA tax shields = $3436363

e. Option B If the marginal corporate tax rate increases over the next five​ years, the PV of the CCA tax shields will be higher than what is calculated in part​ (d).