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ABC Co is considering replacing the equipment it uses to produce tents
ABC Co is considering replacing the equipment it uses to produce tents. The equipment would cost $1.5 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will belong in a 25% CCA class and has a five year life. The required rate of return is 13% and the tax rate is 34%. The annual after-tax cost reduction for the project is $187,500 $63.750 $102,000 X $73,100 141,900 Question 28 0 / 1 point ABC Co is considering replacing the equipment it uses to produce tents. The equipment would cost $1.5 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will belong in a 25% CCA class and has a five year life. The required rate of return is 13% and the tax rate is 34%. The CCA tax shield for year 1 is rate $63,750 dep xtax $141,900 $187,500 $102,000 * $73,100
Expert Solution
Correct Option is $141900
Reason :
Annual After Tax Cost Reduction = Savings in Manufacturing Cost * (1 - Tax rate)
= 215000 * (1 - 0.34)
= 141900
Answer :28) Correct option is 63750
Reason :
In case of CCA Depreciation method in the first year half depreciation is allowed .Therefore
Tax saving on Depreciation = Depreciation * Tax rate
= (Cost * CCA Rate * 1/2) * 34%
= (1500000 * 25% * 1/2) * 34%
= 63750
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