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-Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The cars belong to asset class 10 and have a capital cost allowance (CCA)rate of 30%.The cars will be sold at the end of 3 years for $150,000.What is the present value of the lost CCA tax shields of the project,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

Question

Use the table for the question(s)below.
 
-Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The cars belong to asset class 10 and have a capital cost allowance (CCA)rate of 30%.The cars will be sold at the end of 3 years for $150,000.What is the present value of the lost CCA tax shields of the project,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

Quizplus · Accepted Answer

The present value of the lost CCA tax shields can be calculated by considering the depreciation of the asset (using the CCA rate), the tax savings from that depreciation, and then discounting those savings back to the present value using the cost of capital. Given the CCA rate of 30%, a marginal tax rate of 25%, and a cost of capital of 10%, the calculation involves determining the depreciation expense each year, the tax shield it provides, and then discounting those tax shields back to their present value. The correct answer, $21,131, accounts for these factors accurately.

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