Question

a) jhon Contracting Inc. is considering the purchase of a new dump truck for $ 100,000 . If this vehicle can be depreciated for tax purposes at 30 %, what is the undepreciated capital cost of the vehicle after five years , using the CCA half year method ?
b) If jhon pays taxes at the rate of 35 % and its cost of capital is 12 %, what is the net present value of the tax shield for this five - year period ? $25,000

c) If the asset were sold for $25,000 at the end of the fifth year , would this result in an increase or decrease in the undepreciated capital cost balance in the asset pool for this class of asset . Briefly explain why .

Answer 1

1. Computation of undepreciated value of vehicles at the end of fifth year
	CCA	Depreciation	Unclaimed Cost of capital
Original purchase			$                            1,00,000
1St Year	100000*30%*50%	$                 15,000	$                               85,000
2nd Year	85000*30%	$                 25,500	$                               59,500
3rd year	59500*30%	$                 17,850	$                               41,650
4th Year	41650*30%	$                 12,495	$                               29,155
5th Year	29155*30%	$                   8,747	$                               20,409
2. Present value of tax sheild on depreciations
Year	Depreciations	Tax Sheilds	PV factor 12%	PV of depreciations
1	$                 15,000	$                   5,250	0.893	$    4,688
2	$                 25,500	$                   8,925	0.797	$    7,113
3	$                 17,850	$                   6,248	0.712	$    4,448
4	$                 12,495	$                   4,373	0.636	$    2,781
5	$                    8,747	$                   3,061	0.567	$    1,736
				$ 20,767

 

3.

Undepreciated value of asset at the end of the fifth year is $ 20408.50 and sale value of the asset is $ 25000. It will decrease the value of the pool by $ 4591.5.