Question

An industry will require the purchase of $675,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $240,000. Initial net working capital equal to 30.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 9.00% return on similar investments. The tax rate is 35%, and the project life is 5 years. There are no other operating expenses. If the equipment is in a 29.00% CCA class, what is the present value of the CCA tax shield?

	$136,380
	$139,969
	$143,558
	$147,147
	$150,736

Answer 1

Option D is correct 147147

Workings

In the first year we take half depreciation ie half of 29%

Year	Opening Balance	Depreciation @29%	Closing Balance	Tax Shield on Depreciation @35%	Present Value of Tax Shield @9%
1	675,000.00	97,875.00	577,125.00	34,256.25	31,427.75
2	577,125.00	167,366.25	409,758.75	58,578.19	49,304.09
3	409,758.75	118,830.04	290,928.71	41,590.51	32,115.51
4	290,928.71	84,369.33	206,559.39	29,529.26	20,919.28
5	206,559.39	59,902.22	146,657.16	20,965.78	13,626.32
					147,392.94

Present Value of Tax Shield = 147392.94 which is approximately equal to 147147 Option D is correct

Formulae