Carolyn owns a data processing company. She plans to buy additional equipment for $55,000, use it for four years, and sell it for $13,000. She expects that the use of the equipment will produce a net income of $22,000 per year. The combined federal and provincial incremental tax rate is 40%. Using a CCA rate of 55% and a borrowing interest rate of 9%, answer the following questions. Completing the table below the questions may help do so. Round answers to the nearest dollar. a) What is the book value when the equipment is sold? b) Does a gain (Recaptured Depreciation) or a loss (Loss on Disposal) occur when the equipment is sold? What is the amount of gain or loss? c) What is the net present worth of the after-tax cash flow? Was it a good decision to purchase the equipment?

Carolyn owns a data processing company. She plans to buy additional equipment for $55,000, use it for four years, and sell it for $13,000. She expects that the use of the equipment will produce a net income of $22,000 per year. The combined federal and provincial incremental tax rate is 40%. Using a CCA rate of 55% and a borrowing interest rate of 9%, answer the following questions. Completing the table below the questions may help do so. Round answers to the nearest dollar. a) What is the book value when the equipment is sold? b) Does a gain (Recaptured Depreciation) or a loss (Loss on Disposal) occur when the equipment is sold? What is the amount of gain or loss? c) What is the net present worth of the after-tax cash flow? Was it a good decision to purchase the equipment? Year Before-Tax Cash Flow CC Taxable Income Income Taxes After-Tax Cash Flow PW 0 n/a n/a n/a -$55,000 -$55,000 1 2 -$55,000 +$22,000 +$22,000 +$22,000 +$22,000 +$13,000 3 4 4 NPW