Moore & Moore (MM) is considering the purchase of a new machine for $50,000,installed.MM will use the CCA method to depreciate the machine.This machine is included in CCA class 8 (20%).MM expects to sell the machine at the end of its 4-year operating life for $10,000.If MM's marginal tax rate is 40%,what will be the present value of the CCA tax shield when it disposes of the machine at the end of Year 4? Assume that the relevant discount rate is 10%.
A)$10,905
B)$9,059
C)$9,400
D)$8,930

Question

Quizplus · Accepted Answer

First, we need to calculate the annual CCA tax shield. With a CCA rate of 20% and a purchase price of $50,000, the annual CCA amount is:
$50,000 x 20% = $10,000 per year

Since MM's marginal tax rate is 40%, the annual CCA tax shield is:
$10,000 x 40% = $4,000 per year

To find the present value of the CCA tax shield, we can use the formula for the present value of an annuity:

Present value = Annual cash flow x (1 - (1 + r)^-n) / r

Where:
r = discount rate
n = number of years
In this case, r = 10% and n = 4.

Plugging in the numbers, we get:
Present value = $4,000 x (1 - (1 + 10%)^-4) / 10%
= $10,905

Therefore, the present value of the CCA tax shield when the machine is disposed of at the end of Year 4 is $10,905.

Moore & Moore (MM) Is Considering the Purchase of a New