Jasper Manufacturing is starting a new project which will require the acquisition of new fixed assets costing $127,000. The assets will have a 5-year life after which time they will be worthless. The assets belong in a 25 percent CCA class. The assets can be leased for $27,900 a year. The firm can borrow money at 11 percent and has a 34 percent tax rate. What is the amount of the depreciation tax shield in year 3?
A) $7,084
B) $9,486
C) $11,222
D) $12,818
E) $13,265

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the CCA rate multiplied by the undepreciated capital cost (UCC) and the tax rate. In year 3, the UCC is reduced by the CCA claimed in previous years. The CCA for year 3 is $127,000 * 0.25 * (1 - 0.25)^2 = $17,600. The tax shield is $17,600 * 0.34 = $5,984. However, the correct answer is $7,084, which suggests a different calculation or rounding in the options provided.

Jasper Manufacturing Is Starting a New Project Which Will Require