A construction company spends $1.4 million to purchase a new crane.The crane will have a capital cost allowance (CCA)rate of 25%.If the opportunity cost of capital is 7%,and the company's marginal tax rate is 20%,what is the present value of the CCA tax shield?

Question

Quizplus · Accepted Answer

The CCA tax shield is calculated as follows:

CCA tax shield = CCA rate x capital cost x (1 - tax rate) x PV factor

where PV factor = 1 / (1 + opportunity cost of capital)

Substituting the given values:

CCA tax shield = 0.25 x 1,400,000 x 0.8 x (1 / 1.07) = $211,595

Therefore, the present value of the CCA tax shield is $211,595. The correct answer is C.

A Construction Company Spends $1