Maxine's is considering either purchasing or leasing a $600,000 piece of specialized equipment. The equipment has a life of 5 years, belongs in a 30% CCA class, and will have no residual value.
The cost of debt is 12% for this purchase. A lease on the equipment for 5 years is priced at
$150,000 a year. Maxine's corporate tax rate is 34%. The lessor has a tax rate of 35%.
What is the amount of annual depreciation Maxine's can claim in the ﬁrst year if the ﬁrm purchases
The equipment?
A) $60,000
B) $90,000
C) $120,000
D) $160,000
E) $180,000

Question

Quizplus · Accepted Answer

The annual depreciation Maxine's can claim in the first year is calculated using the CCA rate of 30% on the declining balance. For the first year, the depreciation is 30% of $600,000, which is $180,000. However, due to the half-year rule, only half of this amount can be claimed, resulting in $90,000.

Maxine's Is Considering Either Purchasing or Leasing a $600,000 Piece