Question

An asset has an installed cost of $1 million, a life of 10 years, a CCA rate of 30%, and a salvage value of $30,000. What is the relevant present value of CCA tax shields from the lessee's point of view, if the lessee's marginal tax rate is 40% and borrowing cost is 12%?

$311,748

$267,648

$235,007

$306,919

$316,576

Answer 1

Answer:

Correct answer is:

$267,648

Explanation:

Given:

Initial Cost of Asset (C) = $1000000

CCA rate (d) = 30%

Corporate tax rate (T_c) = 40%

Discount rate (k) = 12%

Salvage value (S_n) = $30,000

Life of project (n) = 10 years

Then:

Present Value of CCA tax shields is given by following formula:

C.d.T. k+d S.-T +d 1 (1+k)" CA Tax Shields (1+ k k

= (1000000* 30%*40% / (12% + 30%) *(1 + 12%/2) / (1 + 12%)) - ((30000 * 30% * 40%)/ (12% + 30%) * 1/(1+12%)¹⁰)

= $267,648.39

Present Value of CCA tax shields = $267,648.39   

Hence option B is correct and other options A, C, D and E are incorrect.