Asked by Elisa Otero on May 28, 2024
Verified
The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next five years. The necessary foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate. What is the depreciation tax shield in the third year for this project?
A) $21,240
B) $49,980
C) $100,420
D) $104,340
E) $121,040
CCA Class
Capital Cost Allowance Classes are categories in tax systems that determine the depreciation rate for tax purposes on assets.
Depreciation Tax Shield
The reduction in taxable income for businesses due to the allowance for depreciation, thereby lowering tax liabilities.
Foundry
A foundry is a factory that melts metal and pours it into molds to create castings, often used in manufacturing processes for various industries.
- Understand the impact of corporate tax rates on the depreciation tax shields and the valuation of projects.
- Acquire knowledge on the effects of depreciation and the determination of a depreciation method, for instance, CCA, on a project's net present value (NPV) and its cash flows.
Verified Answer
Learning Objectives
- Understand the impact of corporate tax rates on the depreciation tax shields and the valuation of projects.
- Acquire knowledge on the effects of depreciation and the determination of a depreciation method, for instance, CCA, on a project's net present value (NPV) and its cash flows.
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