A project will increase sales by $140,000 and cash expenses by $95,001. The project will cost $100,000 and belong in a 30% CCA class. The company has a marginal tax rate of 34%. What is the
Value of the depreciation tax shield in the second year?

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. In the second year, the CCA (Capital Cost Allowance) is calculated as 30% of the remaining undepreciated capital cost (UCC). In the first year, the CCA is 30% of $100,000, which is $30,000. The remaining UCC for the second year is $70,000, and the CCA for the second year is 30% of $70,000, which is $21,000. The tax shield is $21,000 multiplied by the tax rate of 34%, which equals $7,140. However, the correct choice is $8,670, which suggests a calculation error or different assumptions in the problem setup.

A Project Will Increase Sales by $140,000 and Cash Expenses