High Fashion Boutique is contemplating the acquisition of some new equipment. The purchase price is $29,000. Assume that the CCA for works out to be 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent of the value over years 1 to 4, respectively. The equipment can be leased for $7,500 a year. The firm can borrow money at 8.75 percent and has a 35 percent tax rate. What is the amount of the CCA tax shield in year 2?

Question

Quizplus · Accepted Answer

The CCA tax shield in year 2 can be calculated by applying the year 2 CCA rate (44.44%) to the remaining undepreciated capital cost (UCC) after year 1, and then multiplying by the tax rate (35%). The UCC after year 1 is the initial cost minus the CCA in year 1. The CCA in year 1 is 33.33% of $29,000, which is $9,665.70. So, the UCC at the start of year 2 is $29,000 - $9,665.70 = $19,334.30. The CCA in year 2 is 44.44% of $19,334.30 = $8,592.59. The tax shield is 35% of $8,592.59 = $3,007.26.

High Fashion Boutique Is Contemplating the Acquisition of Some New