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 depreciation tax shield for year 3.

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 depreciation tax shield for year 3.

Compute the depreciation tax shield for year 3.

Quizplus · Accepted Answer

To calculate the depreciation tax shield for year 3, we first need to calculate the Capital Cost Allowance (CCA) for each year and then apply the tax rate to the CCA of year 3.1. Initial cost of the machine = $80,0002. CCA rate = 30%3. Tax rate = 34%Year 1:- CCA for Year 1 = 30% of $80,000 = $24,000- Remaining value after Year 1 = $80,000 - $24,000 = $56,000Year 2:- CCA for Year 2 = 30% of $56,000 = $16,800- Remaining value after Year 2 = $56,000 - $16,800 = $39,200Year 3:- CCA for Year 3 = 30% of $39,200 = $11,760The depreciation tax shield for Year 3 is the CCA for Year 3 multiplied by the tax rate:- Depreciation tax shield for Year 3 = $11,760 * 34% = $3,998.40However, none of the provided options exactly match the calculated value. The closest option to the calculated value is not listed correctly, indicating a possible miscalculation or misunderstanding in the provided options or the calculation process. Given the options, the correct approach was demonstrated, but the exact match is not present, suggesting a need to reevaluate the options or calculation.

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