You are considering adding a microbrewery onto one of your firm's existing restaurants.This will entail an investment of $40,000 in new equipment.The new equipment falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.If your firm's marginal corporate tax rate is 35%,then what is the value of the microbrewery's CCA tax shield in the first year of operation?

Question

Quizplus · Accepted Answer

The value of the CCA tax shield in the first year is calculated by multiplying the investment amount by the CCA rate and then by the firm's marginal tax rate. Thus, $40,000 * 30% = $12,000 is the CCA for the first year. The tax shield value is $12,000 * 35% = $4,200. However, since CCA is calculated on a declining balance, only half of the CCA rate applies in the first year (the "half-year rule"), making the correct calculation $40,000 * 15% = $6,000, and the tax shield is $6,000 * 35% = $2,100.

You Are Considering Adding a Microbrewery onto One of Your