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ashly138 ashly138
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7 years ago
Windpower Systems Maintenance Ltd. purchased a CCA Class 10 (CCA rate of 30%) vehicle for $360,000. The vehicle was the only item in the Class 10 capital cost allowance pool. The vehicle is expected to generate net cash income, excluding any tax effects, in the amount of $70,000 per year. The company uses straight-line depreciation, estimates a 6 year useful life with a $40,000 salvage value for the new vehicle at the end of year 6. The marginal tax rate is 35% and the company's average tax rate is 25%. Management requires a rate of return of 15.0%. Assume that cash flows occur at the end of the year.

Required:
a.   What is the unamortized capital cost at the beginning of year 2 if the maximum capital cost allowance that is allowed is taken in the first year?
b.   What is the net present value of the investment in the vehicle?
Textbook 
Cost Accounting: A Managerial Emphasis, Canadian Edition

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
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7 years ago
a.   $360,000 - [$360,000 × (30% × 1/2) = $306,000

b.   Net present value

   1.   PV of after-tax net cash income: pmt = $70,000 × (1-0.35); i = 15%; n = 6
      = $172,194

   2.   PV tax shield:
      = [($360,000 × 30% × 35%)/(30% + 15%)] × [(1 + (0.5 × 15%))/(1 +15%)] minus [($40,000          × 30% × 35%)/(30% + 15%)]  × [1/(1 + 15%)6]
   = ($84,000.00 × 0.9348) minus ($ 9,333.33 × 0.4323)
   = $74,487 (difference due to rounding)

3.   PV of salvage value: FV = $40,000; i = 15%; n = 6
      = $17,293

   NPV = - $360,000 + $172,194 + $74,487+ $17,293 = $ (96,026)
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