Question 1

Use the information below to answer the following question(s).Albernie Ltd.purchased a CCA Class 8 (CCA rate of 20%)item of equipment for $90,000.The equipment was the only item in the Class 8 capital cost allowance pool.The equipment is expected to generate savings in the amount of $40,000 per year.The company uses straight-line depreciation, estimates a 3 year useful life with $20,000 salvage value for the new equipment.The tax rate is 35%, and Albernie has a required rate of return of 9.0%.
-What is present value of the salvage value that Albernie Ltd.is expecting from the equipment?

Accepted Answer

The salvage value is $20,000, but in order to determine the present value, we need to discount it back to the present using the required rate of return. Using the formula for present value of a future amount:
PV = FV / (1+r)^n
PV = 20,000 / (1+0.09)^3
PV = $15,444. Therefore, the best choice is C.

Question 2

Use the information below to answer the following question(s).Albernie Ltd.purchased a CCA Class 8 (CCA rate of 20%)item of equipment for $90,000.The equipment was the only item in the Class 8 capital cost allowance pool.The equipment is expected to generate savings in the amount of $40,000 per year.The company uses straight-line depreciation, estimates a 3 year useful life with $20,000 salvage value for the new equipment.The tax rate is 35%, and Albernie has a required rate of return of 9.0%.
-What is present value of the tax shield that Albernie Ltd.can expect from the equipment?

Accepted Answer

The answer of Use the information below to answer the...

Question 3

The income tax depreciation method referred to as CCA

Accepted Answer

CCA (Capital Cost Allowance) in Canada ignores estimated salvage value when calculating depreciation for tax purposes.

Question 4

Biermann Equipment is a publicly held corporation required to pay income taxes.For the current year it had revenues of $5,000,000 and cash expenses of $3,000,000, and claimed CCA of $200,000.The company has a 30 percent tax rate.What would be the net cash flow for the current year if all revenues and expenses were in cash?

Accepted Answer

The answer of Biermann Equipment is a publicly held corporation...

Question 5

A project's net present value is increased if

Accepted Answer

If the CCA (capital cost allowance) rate is increased, it allows for larger depreciation expenses, which will result in larger tax savings and therefore an increase in the project's net present value.

Question 6

Wilf Company acquired an additional Class 10 (30% declining balance)asset for $60,000.The UCC at the beginning of the year was $100,000.The maximum CCA in the current year is

Accepted Answer

The maximum CCA is calculated as 30% of the UCC at the beginning of the year plus half of the net additions. The UCC is $100,000, and the net addition is $60,000. The half-year rule applies to the addition, so the CCA is 30% of ($100,000 + $30,000) = $39,000.

Question 7

A company purchased a class 8 asset (there were no disposals).If the asset cost $20,000, had an estimated salvage value of $5,000, using the declining balance method with an allowable rate of 20%, the allowable CCA in the first and second years would be, respectively

Accepted Answer

First, we need to calculate the CCA rate using the declining balance method with a 20% allowable rate:

Year 1: 20% x $20,000 = $4,000
Year 2: 20% x ($20,000 - $4,000) = $3,200

However, we need to take into account the estimated salvage value of $5,000. This means that in Year 2, we can only claim CCA on the remaining balance of ($20,000 - $4,000 - $3,200 - $5,000) = $7,800.

Therefore, the allowable CCA in the first and second years would be:

Year 1: $4,000
Year 2: $3,600 ($3,200 + 20% x $7,800)

The answer is B), $2,000 and $3,600.

Question 8

Which of the following are not considered in capital-budgeting?

Accepted Answer

Depreciation is a non-cash expense and does not directly affect cash flows, which are the primary concern in capital budgeting.

Question 9

Clock Manufacturing Company purchased a new piece of equipment at a cost of $60,000 at the beginning of the year.For tax purposes the machine is a Class 8 asset (20% declining balance).The company has a 34 percent income tax rate.Assume that the company has no other Class 8 assets during the period.Required:
a.Compute the amount of tax savings from CCA for the first three years.
b.Compute the amount of tax savings from CCA for the first three years using a required rate of return of 12 percent.

Accepted Answer

The answer of Clock Manufacturing Company purchased a new piece...

Question 10

Use the information below to answer the following question(s).Albernie Ltd.purchased a CCA Class 8 (CCA rate of 20%)item of equipment for $90,000.The equipment was the only item in the Class 8 capital cost allowance pool.The equipment is expected to generate savings in the amount of $40,000 per year.The company uses straight-line depreciation, estimates a 3 year useful life with $20,000 salvage value for the new equipment.The tax rate is 35%, and Albernie has a required rate of return of 9.0%.
-What is the maximum capital cost allowance that Albernie Ltd.can claim in year 2, if the maximum was claimed in year 1?

Accepted Answer

The maximum capital cost allowance (CCA) that can be claimed in year 2, if the maximum was claimed in year 1, can be calculated as follows:

Year 1 CCA = $90,000 x 20% = $18,000
Year 2 CCA = ($90,000 - $18,000) x 20% = $14,400

However, since the maximum CCA was claimed in year 1, the Year 2 CCA will be reduced by half of the Year 1 CCA. Therefore:

Adjusted Year 2 CCA = $14,400 - ($18,000 / 2) = $9,900

Therefore, the maximum capital cost allowance that Albernie Ltd. can claim in year 2 is $9,900, which is option D.

Question 11

A new machine will cost $1,800,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 38% and it requires a 9% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

Accepted Answer

The answer of A new machine will cost $1,800,000.It is...

Question 12

The three factors that generally influence depreciation under IFRS/ASPE are: amount allowable for depreciation, allowable life of asset, and allowable methods of depreciation.In Canada, for tax purposes

Accepted Answer

Under Canadian tax law, the Capital Cost Allowance (CCA) is based on the cost of the asset and the class it belongs to, with a specified rate for each class. The estimated life and salvage value are not considered in the CCA calculation.

Question 13

If the appropriate tax rate is 35%, the after-tax effect of a single CCA deduction of $60,000 is

Accepted Answer

The after-tax effect of a single CCA deduction of $60,000 can be calculated as follows:

Tax savings = CCA deduction x tax rate
Tax savings = $60,000 x 35%
Tax savings = $21,000

Therefore, the net after-tax cash inflow would be $21,000.

Question 14

Use the information below to answer the following question(s).Albernie Ltd.purchased a CCA Class 8 (CCA rate of 20%)item of equipment for $90,000.The equipment was the only item in the Class 8 capital cost allowance pool.The equipment is expected to generate savings in the amount of $40,000 per year.The company uses straight-line depreciation, estimates a 3 year useful life with $20,000 salvage value for the new equipment.The tax rate is 35%, and Albernie has a required rate of return of 9.0%.
-What is present value of the after-tax savings that Albernie Ltd.expects during the useful life of the equipment?

Accepted Answer

The present value of the after-tax savings is $65,814. This is calculated as follows:PV = $40,000 * (1 - 0.35) * (1 / 0.09) * (1 - (1 / (1 + 0.09)^3))PV = $65,814

Question 15

Better Products Ltd.had annual net income of $20,000, CCA of $40,000, a 40 percent tax rate, a discount rate of 10 percent and annual cash sales of $200,000.The depreciable assets of Better Products belong in several different classes under the Income Tax Act, have a salvage value of zero at the end of six years, and were all bought new at the beginning of Year 1.What is the tax saving from CCA?

Accepted Answer

The tax saving from CCA is calculated as CCA multiplied by the tax rate: $40,000 * 0.40 = $16,000.

Question 16

A new machine will cost $500,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 40% and it requires a 15% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

Accepted Answer

The answer of A new machine will cost $500,000.It is...

Question 17

Use the information below to answer the following question(s).Albernie Ltd.purchased a CCA Class 8 (CCA rate of 20%)item of equipment for $90,000.The equipment was the only item in the Class 8 capital cost allowance pool.The equipment is expected to generate savings in the amount of $40,000 per year.The company uses straight-line depreciation, estimates a 3 year useful life with $20,000 salvage value for the new equipment.The tax rate is 35%, and Albernie has a required rate of return of 9.0%.
-What is the net present value of the Albernie Ltd.investment in equipment?

Accepted Answer

The answer of Use the information below to answer the...

Question 18

Which of the following statements is TRUE?

Accepted Answer

The answer of Which of the following statements is TRUE?
...

Question 19

A new machine will cost $720,000.It is in a CCA class pool that uses a declining balance rate of 20%.The company's tax rate is 42% and it requires a 12% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

Accepted Answer

The answer of A new machine will cost $720,000.It is...

Question 20

Which of the following is not a relevant cash flow in capital budgeting?

Accepted Answer

Accumulated depreciation is a non-cash expense and therefore not a relevant cash flow in capital budgeting. The other options are all relevant cash flows to consider.

Quiz 20: Capital Budgeting: Methods of Investment Analysis