A machine costs $60 and requires $35 in maintenance for each year of its three year life. After three years, this machine will be replaced. If the machine belongs in a 30% CCA class and has no
Salvage value, what is the EAC? Assume a tax rate of 34% and a discount rate of 14%.

Question

Quizplus · Accepted Answer

To calculate the EAC, we need to find the present value of all cash flows related to the machine over its 3-year life.

- The initial cost of the machine is $60, which is a capital expenditure and not tax-deductible in the year of purchase.
- The annual maintenance expenses of $35 are tax-deductible, and we can calculate the tax shield for each year as follows:
    - Year 1 tax shield = $35 * 34% = $11.90
    - Year 2 tax shield = $35 * 34% = $11.90
    - Year 3 tax shield = $35 * 34% = $11.90
- We also need to calculate the depreciation expense for each year, using the CCA rate of 30%:
    - Year 1 depreciation = $60 * 30% = $18.00
    - Year 2 depreciation = ($60 - $18) * 30% = $12.60
    - Year 3 depreciation = ($60 - $18 - $12.60) * 30% = $6.98
- Finally, we need to calculate the salvage value, which is zero in this case.

Using these inputs, we can calculate the EAC as follows:

EAC = -$60 + ($35 - $11.90) / (1+14%) + ($35 - $11.90) / (1+14%)^2 + ($35 - $11.90 + $6.98) / (1+14%)^3
    = -$43.32

Therefore, the best choice is B) -$43.32.

A Machine Costs $60 and Requires $35 in Maintenance for Each