Question

Machine X costs $248,751 and has annual operating and maintenance costs of $9,980. Machine Y costs $264,500 and has annual operating and maintenance cost of $5,120. Both machines are Class 39, which specifies a CCA rate of 25%. The company needs the machines for 11 years, and at the end of year 11 machine X can be sold for $12,257 and machine Y can be sold for 13,033. The Company's MARR is 10%, and its marginal tax rate is 35%. Do an after-tax analysis to determine which machine should be chosen.

Answer 1

Capital Cost Allowance is (CCA) is a yearly deduction in the Income Tax Code that can be claimed on depreciable assets. This is applied on the book value of asset over the expense period using declining balance method.

The depreciation is calculated as follows:

Depreciation per annum = (Net Book Value - Residual Value) x %Depreciation Rate

.The marginal tax rate is applicable when a machine is sold above its basis price. Basis price is first cost minus depreciation.

Method

1. Calculate Yearly depreciation by using

Depreciation per annum = (Net Book Value - Residual Value) x %Depreciation Rate

2. Calculate net book value for the following year by

Net book value at next year=net book value of current year -depreciation of current year

3. Calculate total expenes for the whole year by using

Total expence= yearly O&M expenses+depreciation

4. Calculate present value of yearly expences.

5. Calculate total present value of expenses by adding present value of yearly expences.

6. Calculate Basis price after 11 years by

Basis price=first cost-total depreciation

7. Calculate pfofit/loss from sale after 11 years

8. Calculate Marginal tax on profit and convert to present value

9. Add item 8 to total present value of expenses to get total expenses +tax

10. Compare total expenses of Machine X and Machine Y.

The tables are presented below

It is seen that:

Total present value of expenses+tax for Machine X is $ 330031.56

Total present value of expenses+tax for Machine Y is $ 210215.07< Machine X

Hence Machine Y should be selected