Question

10. The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%. The firm is in the 35% tax bracket and has a cost of capital of 10%. The CCA tax shield for the Sisyphean Corporation's project in the first year is closest to:

a. $8000

b. $1575

c. $2800

d. $5200

Answer 1

Solution :

The formula for calculating the CCA tax shield is

= Cost of the asset * 0.50 * CCA Rate * Tax Rate

As per the Information given in the question we have

Cost of the Asset = $ 30,000   ;   CCA Rate = 30 % ;   Tax Rate = 35 %

Applying the available information in the formula we have CCA tax shield as

= $ 30,000 * 0.50 * 30 % * 35 %

= $ 1,575

Thus CCA tax shield for the Sisyphean Corporation's project in the first year is closest to = $ 1,575

The solution is Option b. $ 1,575

Note : As per CCA rules, only 50 % of the cost of the asset is eligible for CCA in the first year of use. Thus in the formula Cost of the asset is being multiplied by 0.5 to effect the same.