Manti Company purchased a new machine on January 2, Year 1. Cost and other data relating to the machine follow:

The machine is in Class 7 with a maximum 15% CCA rate. Manti uses an after-tax discount rate of 12% for capital budgeting decisions. The income tax rate is 40%.
-If Manti deducts the maximum CCA for tax purposes,what will be the approximate present value (as of January 2,Year 1)of the CCA tax shield for Year 1?

Question

Manti Company purchased a new machine on January 2, Year 1. Cost and other data relating to the machine follow:

The machine is in Class 7 with a maximum 15% CCA rate. Manti uses an after-tax discount rate of 12% for capital budgeting decisions. The income tax rate is 40%.
-If Manti deducts the maximum CCA for tax purposes,what will be the approximate present value (as of January 2,Year 1)of the CCA tax shield for Year 1?

Quizplus · Accepted Answer

The present value of the CCA tax shield is calculated by multiplying the CCA deduction by the tax rate and then discounting it back to the present value. The correct calculation leads to approximately $3,751.

Manti Company Purchased a New Machine on January 2, Year