Question

A slitter for sheet sandpaper owned by Abbotsford Abrasives (AA) requires regular main costing $7500 per year. Every five years it is overhauled at a cost of $25 000. The tenance original capital cost was $200 000, and an additional $25 000 in non-capital expenses was incurred at the time of installation. The machine has an expected life of 20 years and a $15 000 salvage value, and it will not be overhauled at the end of its life. AA pays taxes at a rate of 45 percent and expects an after-tax rate of return of 10 percent on investments. Recalling that the CCA rate for production equipment is 20 percent, what is the after-tax annual cost of the slitter

Answer 1

Computation of after tax annual cost of slitter -

annual maintenance cost $7,500

overhaul cost $5,000

Depreciation $10,500

[ ($ 200,000 + $ 25,000 - $ 15,000 ) / 20]

Total $23,000

CCA $20,000 (only for first year, this will be different in subsequent years)

(first year depreciation expense claim on half of purchase price and in subsequent years on remianing amount)

( $200,000 / 2 * 20% = $20,000)

so it can be concluded that $23,000 is fixed cost and minus CCA which will be different from year to year.

Also if return is expected after tax 10% then before tax it should be 18.181818%(10%/0.55)

So, cost is $23,000