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4. A. Six years ago, the Zircon company purchased a long-term asset for $3,875,500. The asset...

4. A. Six years ago, the Zircon company purchased a long-term asset for $3,875,500. The asset has a 20% CCA rate. Recently, at the end of year six, Zircon sold the asset for 850,000. Given this information, determine the value of the terminal loss or recapture at the end of year six.

B. Zircon Company's effective tax rate is 26%. Calculate the value of the CCA tax shield for the third year (year 3).

btw, what are "effective tax rate" and "the CCA tax shield"?

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Answer #1

purchase price

$ 3,875,500

CCA rate

20%

tenor

               6.00

sales price =

$     850,000

    Particular

    Formula

    years

    1

    2

    3

    4

    5

    6

    opening balance

    last year’s closing balance

    $ 3,875,500

    $   3,487,950

    $   2,790,360

    $   2,232,288

    $   1,785,830

    $   1,428,664

    depreciation

    (20% * opening balance)

    $     387,550

    $ 697,590.00

    $ 558,072.00

    $ 446,457.60

    $ 357,166.08

    $ 285,732.86

    closing value

    opening balance - dep

    $ 3,487,950

    $   2,790,360

    $   2,232,288

    $   1,785,830

    $   1,428,664

    $   1,142,931

    (For the 1st year, CCA value is half of the actual amount.)

      for year 3:

      CCA value =

      $                                 558,072

      tax rate

      26%

      CCA tax shield=

      value of depreciation * tax rate

      $                           145,098.72

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