You purchase equipment for $130,000 and it costs $10,000 to have it delivered and installed. Based on the past information, you believe that you can sell the equipment for $14,000 when you are done with it in 8 years. The company’s marginal tax rate is 35%. If the applicable CCA rate is 20% and the required return on this project is 12%, what is the present value of the CCA tax shield?Use scientific calculator and round your sub-totals to 4 decimals and final result to whole dollars (no decimals). Provide rates as decimals (e.g. for 15% you input number 0.15)Fill in the following:I = Total Capital Investment is equal to $Blank 1.d = CCA tax rate is equal to Blank 2Tc = Corporate Tax Rate is Blank 3k = discount rate is equal to Blank 4Sn = Salvage value in year Blank 5 is $Blank 6n = number of periods in the project is equal to Blank 7CCA tax shield is $Blank 8.
Question
You purchase equipment for 10,000 to have it delivered and installed. Based on the past information, you believe that you can sell the equipment for Blank 1.d = CCA tax rate is equal to Blank 2Tc = Corporate Tax Rate is Blank 3k = discount rate is equal to Blank 4Sn = Salvage value in year Blank 5 is Blank 8.
Solution 1
I = Total Capital Investment is equal to 10,000 = 14,000. n = number of periods in the project is equal to 8.
To calculate the present value of the CCA tax shield, we need to determine the CCA tax shield for each year and then discount it to present value.
CCA tax shield for each year = d * I * Tc CCA tax shield for each year = 0.20 * $140,000 * 0.35
Now, let's calculate the present value of the CCA tax shield using the formula:
Present value of CCA tax shield = CCA tax shield for year 1 / (1 + k) + CCA tax shield for year 2 / (1 + k)^2 + ... + CCA tax shield for year 8 / (1 + k)^8
Present value of CCA tax shield = (0.20 * 140,000 * 0.35) / (1 + 0.12)^2 + ... + (0.20 * $140,000 * 0.35) / (1 + 0.12)^8
Using a scientific calculator, we can calculate the present value of the CCA tax shield to be $Blank 8.
Solution 2
I = Total Capital Investment is equal to 10,000 = 14,000. n = number of periods in the project is equal to 8.
To calculate the present value of the CCA tax shield, we need to determine the CCA tax shield for each year and then discount it to present value.
CCA tax shield for each year = d * I * Tc
CCA tax shield for each year = 0.20 * $140,000 * 0.35
CCA tax shield for each year = $9,800
To calculate the present value of the CCA tax shield, we need to discount the CCA tax shield for each year using the discount rate.
Present value of the CCA tax shield = CCA tax shield for each year * (1 - (1 + k)^(-n)) / k
Present value of the CCA tax shield = $9,800 * (1 - (1 + 0.12)^(-8)) / 0.12
Present value of the CCA tax shield = $51,536
Therefore, the present value of the CCA tax shield is $51,536.
Solution 3
I = Total Capital Investment is equal to 10,000 = 14,000. n = number of periods in the project is equal to 8.
To calculate the present value of the CCA tax shield, we need to determine the CCA tax shield for each year and then discount it to present value.
CCA tax shield for each year = d * I * Tc
CCA tax shield for each year = 0.20 * $140,000 * 0.35
CCA tax shield for each year = $9,800
To calculate the present value of the CCA tax shield, we need to discount the CCA tax shield for each year using the discount rate.
Present value of the CCA tax shield = CCA tax shield for each year * (1 - (1 + k)^(-n)) / k
Present value of the CCA tax shield = $9,800 * (1 - (1 + 0.12)^(-8)) / 0.12
Present value of the CCA tax shield = $51,536
Therefore, the present value of the CCA tax shield is $51,536.
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