Homework SourseIf a leased asset were scrapped from a continuing CCA pool a
If a leased asset were scrapped from a continuing CCA pool after four years, and its UCC were $10,000 and its salvage is zero, what would the present value of this asset\'s tax shelter be if the appropriate after-tax borrowing rate is 9 percent, the CCA rate is 20 percent, and the tax rate is 40 percent?
| If a leased asset were scrapped from a continuing CCA pool after four years, and its UCC were $10,000 and its salvage is zero, what would the present value of this asset\'s tax shelter be if the appropriate after-tax borrowing rate is 9 percent, the CCA rate is 20 percent, and the tax rate is 40 percent? |
Solution
Asset’s Tax Shelter
= [UCC x Tax Rate x CCA Rate] / [After tax borrowing rate + CCA Rate]
= [$10,000 x 0.40 x 0.20] / [0.09 + 0.20]
= $800 / 0.29
= $2,759
Present Value Asset’s Tax Shelter
= Asset’s Tax Shelter / [1+r]n
= $2,759 / [1+.09] 4
= $2,759 / 1.41158
= $1,954.55
= $1,955 [Rounded to nearest whole number]
