Question
Trail Holdings, a winemaker located in the Okanagan Valley, is considering opening a new distribution centre in Montreal. Trail will have to spend $250,000 on
Trail Holdings, a winemaker located in the Okanagan Valley, is considering opening a new distribution centre in Montreal. Trail will have to spend $250,000 on new equipment and invest $100,000 in net working capital. Trail will use a five-year planning horizon to coincide with the estimated useful life of the new equipment. Trail’s tax rate is 27%, its cost of capital is 15%, and the applicable CCA rate for the equipment is 50%. The equipment qualifies for 100% full expensing in the year of acquisition. No other assets were disposed of during the year. Assume that at the end of five years, the UCC balance in the CCA class is $0.What is the present value of the CCA tax shield and the present value of taxes related to the salvage for the new equipment, assuming that it will be sold at an expected salvage value of $25,000 at the end of the five-year planning horizon?
a) PV of CCA tax shield = $55,309; PV of taxes related to the salvage = $2,581
b) PV of CCA tax shield = $55,309; PV of taxes related to the salvage = $3,356
c) PV of CCA tax shield = $58,696; PV of taxes related to the salvage = $2,581
d) PV of CCA tax shield = $58,696; PV of taxes related to the salvage = $3,356
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