Your firm needs a computerized line-boring machine which costs $80,000, and requires $20,000 in maintenance for each year of its three year life. After three years, the salvage value will be zero. The machine falls into the Class 10 equipment category (CCA rate 30%). Assume a tax rate of 34% and a discount rate of 10%.

Compute the annual after-tax maintenance cost.

Question

Your firm needs a computerized line-boring machine which costs $80,000, and requires $20,000 in maintenance for each year of its three year life. After three years, the salvage value will be zero. The machine falls into the Class 10 equipment category (CCA rate 30%) . Assume a tax rate of 34% and a discount rate of 10%.

Compute the annual after-tax maintenance cost.

Compute the annual after-tax maintenance cost.

Quizplus · Accepted Answer

The annual maintenance cost before tax is $20,000. The after-tax cost is calculated as the before-tax cost minus the tax shield on that cost. The tax shield is the tax rate times the maintenance cost, which is 34% of $20,000 = $6,800. Therefore, the after-tax maintenance cost is $20,000 - $6,800 = $13,200.

Your Firm Needs a Computerized Line-Boring Machine Which Costs $80,000