Hull Small Business is considering an expansion project that requires $135,000 for the purchase of capital assets and $35,000 for additional inventory.The project will generate after-tax operating income of $50,000 per year.The project has a five-year economic life and a CCA rate of 20%.What is the ending UCC upon termination of the project assuming half-year rule is applicable for CCA in year 1?

Question

Quizplus · Accepted Answer

- The total cost of the project is $170,000 ($135,000 for capital assets and $35,000 for additional inventory)
- The CCA rate is 20%, and the half-year rule is applicable in year 1. Therefore, the CCA in year 1 would be 0.5 x 20% x $135,000 = $13,500.
- The UCC (Undepreciated Capital Cost) at the beginning of year 2 would be $135,000 - $13,500 = $121,500.
- The CCA in year 2 would be 20% x $121,500 = $24,300.
- The after-tax operating income in each year is $50,000, so the total after-tax cash inflow over the project's life is 5 x $50,000 = $250,000.
- The net book value (NBV) at the end of year 5 would be $0 (assuming no salvage value), so the UCC at the end of year 5 would be the cumulative CCA taken over the years, which is $13,500 + $24,300 x 4 = $103,500.
- Therefore, the ending UCC upon termination of the project would be $103,500.
- The closest answer choice to this figure is B) $49,766, making it the best choice.

Hull Small Business Is Considering an Expansion Project That Requires