Canadian Donuts is looking at a new investment opportunity, which will require the purchase of a capital asset of $1 million and additional raw materials inventory of $50,000.The project is expected to generate operating revenue of $750,000 per year, and the associated operating expenses are estimated at $350,000 per year.The project has a five-year economic life.This capital asset belongs to asset class 8, which has a CCA rate of 20%.What is the CCA expense for year 3, assuming accelerated investment incentive is applicable for CCA in year 1?

Question

Quizplus · Accepted Answer

CCA expense for year 3 is $128,000.The accelerated investment incentive (AII) allows businesses to claim a first-year CCA deduction of 50% of the capital cost of eligible assets. In this case, the AII deduction is $500,000 (50% of $1 million).The remaining capital cost of the asset is $500,000 ($1 million - $500,000). The CCA rate for asset class 8 is 20%.The CCA expense for year 3 is calculated as follows:CCA expense = Remaining capital cost x CCA rate x Declining balance factorDeclining balance factor = (1 - CCA rate)^nWhere:n = the year of the asset's lifeFor year 3, the declining balance factor is (1 - 0.20)^3 = 0.512.Therefore, the CCA expense for year 3 is:CCA expense = $500,000 x 0.20 x 0.512 = $128,000

Canadian Donuts Is Looking at a New Investment Opportunity, Which