High Fashion Boutique is contemplating the acquisition of some new equipment. The purchase price is $29,000. Assume that the CCA for works out to be 33.33 percent, 44.44 percent, 14.82
Percent, and 7.41 percent of the value over years 1 to 4, respectively. The equipment can be leased
For $7,500 a year. The ﬁrm can borrow money at 8.75 percent and has a 35 percent tax rate. What is
The amount of the CCA tax shield in year 2?

Question

Quizplus · Accepted Answer

We need to calculate the CCA tax shield in year 2. First, we need to find the CCA amount for year 2 using the given rates:

Year 1: $29,000 x 33.33% = $9,669.00
Year 2: $29,000 x 44.44% = $12,911.60
Year 3: $29,000 x 14.82% = $4,296.60
Year 4: $29,000 x 7.41% = $2,148.30

The CCA for year 2 is $12,911.60. To find the CCA tax shield, we need to multiply the CCA amount by the tax rate (35%) and subtract that from the CCA amount.

CCA tax shield in year 2 = ($12,911.60 x 0.35) - $12,911.60 = $4,510.66

Therefore, the answer is B. The best choice is to purchase the equipment and use the CCA tax shield to reduce the tax liability. Leasing the equipment would not provide any CCA tax shield.

High Fashion Boutique Is Contemplating the Acquisition of Some New