A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 3 for $8 million,what would be the present value of the lost CCA tax shields from the sale of this asset,given a tax rate of 40%,and a cost of capital of 12%?

Question

Quizplus · Accepted Answer

The present value of the lost CCA tax shields can be calculated by understanding how the CCA works and its impact on the taxable income. The CCA is a form of depreciation that can be claimed on assets in certain classes, reducing taxable income. The asset in question falls into asset class 43 with a CCA rate of 30%. Over three years, the CCA would reduce the asset's undepreciated capital cost (UCC), thereby reducing the company's taxable income and resulting in tax savings. Selling the asset for $8 million after three years would mean the company could no longer claim these tax shields on the remaining UCC. The calculation involves determining the CCA claimed over the three years, the remaining UCC, the tax savings lost by selling the asset, and discounting those lost savings back to their present value using the cost of capital. The correct answer, D, reflects the most accurate calculation of these factors.

A Textile Company Invests $12 Million in an Open-End Spinning