1. We are considering the purchase of a $560,000 computed based inventory management system. It is in class 10 with a CCA rate of 30 per cent. The computer has a four-year life. It will be worth $30,000 at that time. The system would save us $60,000 pre-tax in inventory-related cost. The relevant tax rate is 38%. Because the new setup is more efficient than our existing one, we would be able to carry less total inventory and thus free $45,000 in net working capital.

Required

a). Calculate the present value of CCA tax shield.

b). Explain why the CCA tax shield is consider a source of cash-inflow.

2. Suppose your firm is considering buying a van costing $85,000. What is the Undepreciated capital cost (UCC) for the van after Six years. Note: the van falls in class 10 with a 30 percent CCA rate. Use the tabular approach when calculating the UCC after Six years.

a) Calculate the UCC at the end of year 6

b) If the Van is sold at $4500 at the end of 6 years, what is the tax implication? what name is assigned to this tax implication?

c) If the Van is sold at $55,000 at the end of 6 years, what is the tax implication? what name is assigned to this tax implication?