DogChew Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9%. The firm's tax rate is 39%. The CCA rate is 20% (Class 8).

What is the present value of the depreciation tax shield?

Question

DogChew Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9%. The firm's tax rate is 39%. The CCA rate is 20% (Class 8) .

What is the present value of the depreciation tax shield?

What is the present value of the depreciation tax shield?

Quizplus · Accepted Answer

The present value of the depreciation tax shield is calculated using the formula: PV = (Tax Rate * CCA Rate * Cost of Equipment) / (Discount Rate + CCA Rate). Substituting the given values: PV = (0.39 * 0.20 * 930,000) / (0.09 + 0.20) = $277,177.

DogChew Products Needs to Replace Its Rawhide Tanning and Molding