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 2?

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 2?

Quizplus · Accepted Answer

The present value of the CCA tax shield is calculated by discounting the tax shield for Year 2 back to Year 1. The tax shield is the CCA amount multiplied by the tax rate, and then discounted using the appropriate discount rate. The given options suggest that $6,193 is the closest approximation.

Manti Company Purchased a New Machine on January 2, Year