A new machine will cost $500,000. It is in a CCA class pool that uses a declining balance rate of 30%. The company's tax rate is 40% and it requires a 15% rate of return on investments. Calculate the cash savings from the tax shield the first year assuming the savings occur at year end.

Question

Quizplus · Accepted Answer

The tax shield is calculated as the CCA deduction multiplied by the tax rate. The first-year CCA deduction is $500,000 * 30% = $150,000. The tax shield is $150,000 * 40% = $60,000. However, since the savings occur at year end, we need to discount it back one year at the required rate of return of 15%: $60,000 / (1 + 0.15) = $52,173.91. None of the options match this exactly, but E is the closest after considering potential rounding errors.

A New Machine Will Cost $500,000