New equipment costs $675,000 and is expected to last for ﬁve years with no salvage value. During this time the company will use a 30% CCA rate. The new equipment will save $120,000 annually
Before taxes. If the company's required rate of return is 12%, determine the PVCCATS of the
Purchase. Assume a tax rate of 35%

Question

Quizplus · Accepted Answer

The PVCCATS of the purchase is $159,710. This is calculated as follows:PVCCATS = (Annual savings * PVAF(r,n)) - (Initial investment * PVF(r,n) * (1 - CCA rate))where:r = required rate of returnn = number of yearsPVAF = present value annuity factorCCA rate = capital cost allowance rateIn this case, we have:r = 12%n = 5PVAF(12%,5) = 3.605CCA rate = 30%Initial investment = $675,000Annual savings = $120,000Plugging these values into the formula, we get:PVCCATS = (120,000 * 3.605) - (675,000 * 3.605 * (1 - 0.30))PVCCATS = $432,600 - $273,375PVCCATS = $159,710

New Equipment Costs $675,000 and Is Expected to Last for ﬁVe