You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an investment of $40,000 in new equipment. The new equipment falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%. If your firm's marginal corporate tax rate is 35%, then what is the value of the microbrewery's CCA tax savings in the first year of operation? a) $2,100

You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an investment of $40,000 in new equipment. The new equipment falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%. If your firm's marginal corporate tax rate is 35%, then what is the value of the microbrewery's CCA tax savings in the first year of operation? a) $2,100

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 22P

See similar textbooks

Related questions

Q: Your company is considering the replacing an old machine with a more efficient model. The new…

A: NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Q: You are contemplating the replacement of an old printing machine with a new model costing $56,000.…

A: When a company sells off its existing assets at a price higher than the book value of the asset,…

Q: You are preparing to produce some goods for sale. You will sell them in one year and you will incur…

A: Net present value is difference between cash flow and initial cost.

Q: Kinky Copies may buy a high-volume copier. The machine costs $60,000 and this cost can be fully…

A: NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Q: consulting firm to analyze the option to expand your sales. According to ABC consulting this is a…

A: Net present value is the difference between the present value of cash flow and initial investment.…

Q: Consider a machine which costs $115,000 now and which has a useful life of seven years. This machine…

A: The following the information in the question: 1. Machine which costs $115,000 2. Useful life of…

Q: What are the Equivalent annual savings?

A: Time value of money (TVM) refers to the method used to measure the amount of money at different…

Q: Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase…

A: Capital Budgeting is a technique that helps to analyze the profitability of the project.

Q: b) You purchase equipment for $50,000 and it costs $5,000 to have it delivered and installed. Based…

A: The value of a tax shield is simply the corporate tax rate multiplied by the cost of debt multiplied…

Q: You are preparing to produce some goods for sale. You will sell them in one year and you will incur…

A: The net present value of a project or investment is the measure of the profitability of the project…

Q: Novel Industries purchases a 41.2 million cyclo-converter. The cyclo-converter will be depreciated…

A: Depreciation is a non-cash expense.Depreciation is charged on fixed asset over a estimated useful…

Q: You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of…

A: FREE CASH FLOW Free cash flow means cash generated from operating activities after the payment of…

Q: A new forklift truck will require an investment of $30,000 and is expected to have year-end MVs and…

A: Given: 1 2 3 4 5 End of Year, k MV, end of the year, k Loss in MV in year k Cost of…

Q: Your company is considering a new project that will require $2,000,000 of new equipment at the start…

A: Project cost = $2,000,000Ending book value = $250,000Depreciable life = 10 yearsCost of capital =…

Question

You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an
investment of $40,000 in new equipment. The new equipment falls under asset class 43 and has a capital
cost allowance (CCA) rate of 30%. If your firm's marginal corporate tax rate is 35%, then what is the value of
the microbrewery's CCA tax savings in the first year of operation?
a) $2,100
b) $14,000
c) $4,200
d) $12,000

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Explain CCA

VIEW

Step 2: Calculate the amount of CCA tax saving

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

You are considering adding a new product to one of your firm’s existing product lines which will generate an additional $200,000 in sales per year and will have a margin of 50% (same as the existing group margin). This will entail an increase in Net Working Capital of $10,000 and an investment in property, plant, and equipment of $50,000 per year. Assuming the company pays no tax and any depreciation in that year is negligible, the annual change in Unlevered Free Cash Flows resulting from the addition of the product is: a $40,000 b $50,000 c $90,000 d $100,000 e $10,000
A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased. Cash flows for owning versus leasing are estimated as follows. Assume that the cash flows from operations will remain level over a 10-year holding period. If purchased, the company will make an equity investment and finance the remainder with an interest-only loan that has a balloon payment due in year 10. The company’s marginal income tax rate is 30% and the after-tax cash flow from sale of the property at the end of year 10 is expected to be $800,000. What would the initial equity investment have to be to generate a 15% incremental rate of return on equity with owning instead of leasing?
A manufacturing company is considerign the purchase of new machinery to increase its production capacity. The company has identified a new machine that costs $500,000 and is expected to increase production by 20%. The company expects to sell the additional products for $600,000, resulting in a net profit of $100,000. The company can finance the purchase through a bank loan with an interest rate of 5% over a five year term. What is the expected return on investment (ROI) for the purchase of the new machinery 5% 10% 20% 25%
Give typing answer with explanation and conclusion If a firm is considering investing $100,000 at the end of 2021 for employee training (operating expense). The benefit of the training is to reduce turnover leading to a decrease in operating expenses of $10,000 per year in the future. The firm’s working capital to revenue ratio is 10% and the firm’s WACC is 6%. Is it better to analyze this investment decision by considering the incremental after-tax operating profit or the incremental after-tax cash flows generated by this investment? Why?
A manufacturing company is considering the purchase of new machinery to increase its production capacity. The company has identified a new machine that costs $500,000 and is expected to increase production by 20%. The company expects to sell the additional products for $600,000, resulting in a net profit of $100,000. The company can finance the purchase through a bank loan with an interest rate of 5% over a five-year term. What is the expected return on investment (ROI) for the purchase of the new machinery?
You plan to buy equipment for $100,000 to be used for your mass production line of your business. The equipment increased the line’s productivity producing an additional net income of $10,000 annually. If the useful life of the machine is 4 years, what should be its resale value to justify the capital investment? You should make a 15% per annum ROI (Return on Investment)
You are asked to evaluate the following project for a corporation with profitable ongoing operations. The required investment on January 1 of this year is $31.000. The firm will depreciate the investment at a CCA rate of 20 percent. The firm is in the 40 percent tax bracket. The price of the product on January 1 will be $106 per unit. That price will stay constant in real terms. Labour costs will be $15.20 per hour on January 1. They will increase at 1 percent per year in real terms. Energy costs will be $7.30 per physical unit on January 1; they will increase at 2.5 percent per year in real terms. The inflation rate is 3.2 percent. Revenue is recelved and costs are paid at year-end: Year 1 Year 2 Year 3 Year 4 Physical production, in units Labour input, in hours Energy input, physical units 390 1,120 170 340 170 1,120 180 1,120 180 1,120 180 180 The risk-free nominal discount rate is 77 percent. The real discount rate for costs and revenues is 4.7 percent. Calculate the NPV of this…
K Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.98 million. The product is expected to generate profits of $1.09 million per year for 10 years. The company will have to provide product support expected to cost $98,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 5.6%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.5%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment? a. What is the NPV of this investment if the cost of capital is 5.6%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.5%, respectively. If the cost of capital is 5.6%, the NPV will be $ (Round to the nearest dollar.) Should the firm undertake the project? (Select the best choice…
Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $1 million per year for 10 years. The company will have to provide product support expected to cost $100,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. (1) What is the NPV of this investment if the cost of capital is 6%? Should the firm undertake the project? Repeat the analysis for discount rates of 2% and 12%.(2) How many IRRs does this investment opportunity have? (3) Can the IRR rule be used to evaluate this investment? Explain.
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost 17 million, and production and sales will require an initial 5 million investment in net operating working capital. The companys tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed 150,000 on research related to the new product last year. Would this change your answer? Explain. c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for 1.5 million after taxes and real estate commissions. How would this affect your answer?