Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Elf on a Shelf Company bought a new computer - assisted design ( CAD ) software for $ 1 0 , 0 0 0 ,

Elf on a Shelf Company bought a new computer-assisted design (CAD) software for $10,000,000 at the beginning of Year 1. The software has a useful life of 3 years and will save the company annual cash operating expenses of $4,000,000 in each of those 3 years. The software will have a zero net salvage value at the end of 3 years. It belongs to Class 12 with a capital cost allowance (CCA) rate of 100%. With special permission from the Canada Revenue Agency, the half-year CCA rule has been waived for the company to permit a maximum 100% CCA deduction for Year 1. The company's income tax rate and after-tax cost of capital are 40% and 12%, respectively.
Required:
1. Calculate the maximum total CCA tax shied available to the company.
2. Calculate the present value of the annual cash savings in operating expenses.
3. Calculate the net present value (NPV) of the investment.
4. Was the internal rate of return (IROR) greater than or less than the company's after-tax cost of capital of 12%?(Note: Do NOT try to calculate the implied actual internal rate or return.)
5. By how much must the annual savings in operating expenses be increased or decreased to make the investment just worthwhile, that is, either zero NPV or 12% IROR?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Hospitality Management Accounting

Authors: Michael M. Coltman, Martin G. Jagels, Martin Jagels

7th Edition

0471348848, 978-0471348849

More Books

Students also viewed these Accounting questions

Question

Did the researcher use triangulation?

Answered: 1 week ago

Question

How would you rate Hsiehs leadership using the Leadership Grid?

Answered: 1 week ago