Calculate the cca allowance anfd the pv of tax shield , Financial Management

Home Inc. is considering buying a new piece of equipment, which will cost $715,000 and has an economic life of 5 years, in order to produce a new line of product.  The company believes they can sell 25,000 units of this new product per year at $130 per unit in each of next 5 years.  The unit variable cost is $110 and total fixed costs (excluding CCA) are $195,000 per year.

The CCA rate for the new equipment is 30% and Home Inc. is going to claim the maximum CCA in each of the next 5 years.

Home Inc. needs to invest $140,000 in net working capital up front which will be fully recovered at the end of 5 years.

The equipment is estimated to be sold at its UCC value at the end of 5 years.

The discount rate is 15% and the tax rate is 35%.

Requirements: Show your calculation

a. Calculate the CCA allowance and ending UCC in each of the 5 years.

b. Calculate the net income and operating cash flow of this new product for each of the 5 years.

c. Calculate the initial investment outlay.

d. Calculate the PV of tax shield on CCA.

e. Determine whether Home Inc. should invest in the new equipment using NPV as the evaluation method.


Posted Date: 2/16/2013 1:16:16 AM | Location : United States

Related Discussions:- Calculate the cca allowance anfd the pv of tax shield , Assignment Help, Ask Question on Calculate the cca allowance anfd the pv of tax shield , Get Answer, Expert's Help, Calculate the cca allowance anfd the pv of tax shield Discussions

Write discussion on Calculate the cca allowance anfd the pv of tax shield
Your posts are moderated
Related Questions
What are multinational corporations (MNCs) and what economic roles do they play? A multinational corporation (MNC) can be described as a business firm incorporated in one count

Illustration  An investor with a 1-year investment horizon purchases a 20-year 5% corporate bond. The prevailing price of the bond is Rs.82.3488 for a yield of 6.2%

Explain about the Financial risk financial risk are presumed to be constant, changing cost of each type of capital, j, over time must be affected only by changes in the supply

PLAYERS IN THE PRIMARY MARKET Some important players in the primary market are: Merchant Bankers When a company approaches the public for funds, merchant bankers manage

INVESTMENT DECISION AND COST OF CAPITAL In Finance, investment decision is disclose the allocation of funds in fixed assets or long term. This decision is also known as capita

how can covered bond affect other secutites price

Given that risk-averse investors demand more return for taking on more risk when they invest, how much more return is appropriate for, say, a share of common stock, than is appropr

Determine the amounts to be recognised in profit or loss and in other comprehensive income in respect of the property for the year ended 31 December 2010.   Evaluate the compliance

Calculation of before-tax return on capital employed Total net before-tax cash flow = 122 + 143 + 187 + 78 = $530000 Total depreciation = 250000 - 5000 = $245000 Average