We are considering the purchase of a $760,000 computed based inventory management system. It is in class 10 with a CCA rate of 30 per cent. The computer has a four-year life. It will be worth $30,000 at that time. The system would save us $60,000 pre-tax in inventory-related cost. The relevant tax rate is 28%. Because the new setup is more efficient than our existing one, we would be able to carry less total inventory and thus free $45,000 in net working capital. The required return is 10 percent. Required 1. Calculate the present value of CCA tax shield. 2. Explain why the CCA tax shield is consider a source of cash-inflow.
We are considering the purchase of a $760,000 computed based inventory management system. It is in class 10 with a CCA rate of 30 per cent. The computer has a four-year life. It will be worth $30,000 at that time. The system would save us $60,000 pre-tax in inventory-related cost. The relevant tax rate is 28%. Because the new setup is more efficient than our existing one, we would be able to carry less total inventory and thus free $45,000 in net working capital. The required return is 10 percent. Required 1. Calculate the present value of CCA tax shield. 2. Explain why the CCA tax shield is consider a source of cash-inflow.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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We are considering the purchase of a $760,000 computed based inventory management system. It is in class 10 with a CCA rate of 30 per cent. The computer has a four-year life. It will be worth $30,000 at that time. The system would save us $60,000 pre-tax in inventory-related cost. The relevant tax rate is 28%. Because the new setup is more efficient than our existing one, we would be able to carry less total inventory and thus free $45,000 in net working capital. The required return is 10 percent.
Required
1. Calculate the
2. Explain why the CCA tax shield is consider a source of cash-inflow.
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