A project will increase sales by $640,000 and cash expenses by $370,001. The required equipment will cost $600,000 and belongs in a 25% CCA class. The company has a marginal tax rate of 35%. What is the value of the depreciation tax shield in the second year?

Question

Quizplus · Accepted Answer

The depreciation tax shield in the second year is calculated using the Capital Cost Allowance (CCA) rate on the undepreciated capital cost (UCC) from the previous year. In the first year, the depreciation expense is $600,000 * 25% = $150,000. The remaining UCC going into the second year is $600,000 - $150,000 = $450,000. The depreciation expense for the second year is then $450,000 * 25% = $112,500. The tax shield is this depreciation expense multiplied by the tax rate: $112,500 * 35% = $39,375.

A Project Will Increase Sales by $640,000 and Cash Expenses