A company has purchased a piece of equipment for $10,000 that has a 5-year useful life and

Question:

A company has purchased a piece of equipment for $10,000 that has a 5-year useful life and no salvage value. The company's tax rate is 30% and its cost of capital is 10%.

a. What is the present value of the CCA tax shield if the equipment has a 20% declining balance CCA rate? (Ignore the half-year rule.)

b. What is the present value of the CCA tax shield if the CCA rate is 20% straight-line?

c. What accounts for the difference in the two present values?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

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