Question

ABC Ltd. is considering a system that will cost $750,000. The new system will be placed in CCA class 39 (CCA rate is 25%), has a useful life of six years, and an expected resale value of $100,000. The company has a tax rate of 40% and an opportunity cost of capital of 15%. What is the present value of the CCA tax shield?

Answer 1

Answer :-

Value of asset after 6 years :-

750000*(0.75)⁶ = 133484$

Note : the cost is multiplied With 0.75 because if cost is Re 1 then depriciation would be 0.25 so the post depriciation cost would be 0.75.

In this case there would be loss as the resale value would be $100000. Therefore the loss is : (133484-100000)$ = 33484$.

The loss would also provide tax shield to the company.

depriciation each year would be :-

Year	cost price /post depriciation	depriciation	depriciation tax shield @40%	present value @15%
0	750000
1		187500	75000	65217
2	562500	140625	56250	42533
3	421875	105469	42188	27739
4	316406	79102	31641	18091
5	237304	59326	23730	11798
6	177978	44494	17798	7695
	Total			173073

Tax shield on loss on resale of asset = 33484*0.40*(1/1.15^{6) =$5790}

The total tax shield would be = 173073+5790 = $178863