For Years 1 through 6 Better Products Ltd. had annual net income of $20,000, CCA of $40,000 each year, a 40 percent tax rate, a discount rate of 10 percent and annual cash sales of $200,000. The depreciable assets of Better Products belong in several different classes under the Income tax Act, have a salvage value of zero at the end of six years, and were all bought new at the beginning of Year 1. The present value factors, in simplified form, for 10 percent are:

-If the appropriate tax rate is 35%, the after-tax effect of a single CCA deduction of $60,000 is

Question

For Years 1 through 6 Better Products Ltd. had annual net income of $20,000, CCA of $40,000 each year, a 40 percent tax rate, a discount rate of 10 percent and annual cash sales of $200,000. The depreciable assets of Better Products belong in several different classes under the Income tax Act, have a salvage value of zero at the end of six years, and were all bought new at the beginning of Year 1. The present value factors, in simplified form, for 10 percent are:
 
-If the appropriate tax rate is 35%, the after-tax effect of a single CCA deduction of $60,000 is

Quizplus · Accepted Answer

First, we need to determine the taxable income before the CCA deduction:

Net Income (per year) = $20,000
CCA (per year) = $40,000
Taxable Income (per year) = $200,000 - $20,000 - $40,000 = $140,000

Next, we need to determine the tax savings from the CCA deduction:

CCA Deduction = $60,000
Tax Shield = $60,000 x 0.35 = $21,000

Finally, we need to determine the after-tax effect of the CCA deduction:

Cash Outflow = $60,000
Net Incremental Cash Flow = Tax Shield - Cash Outflow = $21,000 - $60,000 = -$39,000

Since the Net Incremental Cash Flow is negative, it means that the after-tax effect of the CCA deduction is a net cash outflow of $39,000. Therefore, the best choice is D.

For Years 1 Through 6 Better Products Ltd