The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next ﬁve years. The necessary foundry
And machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax
Purposes. The ﬁrm expects to be able to dispose of the manufacturing equipment for $150,000 at
The end of the project. Labour and materials costs total $500 per engine block, ﬁxed costs are
$125,000 per year. Assume a 35% tax rate and a 12% discount rate.
What is the depreciation tax shield in the third year for this project?

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the CCA rate multiplied by the UCC at the beginning of the year, then multiplied by the tax rate. In the third year, the UCC is reduced by the CCA claimed in the first two years. The calculation involves applying the 30% CCA rate to the remaining UCC and then multiplying by the 35% tax rate.

The Managers of PonchoParts, Inc