The salvage value of a ten-year-old truck is $10 000. If this truck is on the Balance Sheet of a transportation company as a Class 8 asset with a CCA rate of 20%, what was the present worth of this salvage value at the time of the truck's purchase if the corporate tax rate is 35% and annual after-tax interest rate is 5%?

Question

Quizplus · Accepted Answer

To find the present worth of the salvage value at the time of the truck's purchase, we need to discount the future value ($10,000) back to its present value using the after-tax interest rate. The formula for present value (PV) is PV = FV / (1 + r)^n, where FV is the future value, r is the annual interest rate, and n is the number of years. Here, FV = $10,000, r = 5% (0.05), and n = 10 years. So, PV = $10,000 / (1 + 0.05)^10 = $10,000 / 1.62889 ≈ $6,139.13. However, none of the options exactly match this calculation, suggesting a misunderstanding in the approach or a misinterpretation of the question's requirements. Given the options, the closest answer based on the standard present value calculation would be E) $4,420, but this does not align with the calculated present value. The discrepancy suggests that the question might involve additional considerations not accounted for in the basic present value calculation, such as the effects of depreciation or tax implications specific to Class 8 assets and the CCA rate, which were not directly applied in the calculation provided.

The Salvage Value of a Ten-Year-Old Truck Is $10 000