Assignment 6: 6'86'13 6'17 6'19 6'20 8'5 8'7 8'18 8'21 8'25

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Assignment 6 6.8  6.13  6.17  6.19  6.20  8.5 
8.7  8.18  8.21  8.25 Due Date November 17,
2005 (Thursday)

• Depreciation and Taxation (Chapters 6 and 8)
• Depreciation is tax deductible
• Book Value Initial Value of Asset Cumulative
  Depreciation
• Methods of Depreciation
• Straight Line Method (SL)
• Sum of Digits (SD)
• Declining Balance (DB) Revenue Canada
• If d (depreciation rate) is given (Table 8.3
  text) also referred as Capital Cost Allowance
  rate CCA)
• Or based on the Salvage value (S)

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• Depreciation methods (cont)
• Sinking Fund (SF)
• Depreciation constant for each year
• But accumulated depreciation should include
  interest rate
• Taxation
• Taxes are charged over net profits
• Taxes associated with a project Disbursements
• Rule of thumb method
• Detailed tax calculation on annual basis
• Tabular approach
• Assets affected by any type of depreciation
• After tax cash flow is required

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• Capital Cost Tax Factor (CCTF)
• Factor used to obtain after tax cash flow without
  using extensive tables.
• Applying CCTF factor to different cost and income

• First Cost Multiply by CCFTnew ? PW
• Savings or expenses Multiply by (1-t) ? PW
• Salvage value multiply by CCFTold ? PW

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• 6.20 Dick noticed that the book value for an
  asset he owned was exactly 500 higher if the
  value was calculated by straight-line
  depreciation over declining-balance depreciation,
  exactly half-way through the assets service
  life, and the scrap value at the end of the
  service life was the same by either model. If the
  scrap value was 100, what was the purchase price
  of the asset?
• 8.7 Quebec Widgets is looking at a400 000
  digital midget rigid widget gadget (CCA Class 8).
  It is expected to save 85 000 per year over its
  10 year-life, with no scrap value. Their tax rate
  is 45, and their after-tax MARR is 15. On the
  basis of an approximate IRR, should they invest
  in this gadget?
• 8.21 White horse Construction has just bought a
  crane for 380 000. At a CCA rate of 20, what is
  the present worth of the crane, taking into
  account the future benefits resulting from the
  CCA? Whitehorse has a tax rate of 35 and an
  after-tax MARR 6.
• 8.25 A new binder will cost Revelstoke Printing
  17 000, generate net savings of 3000 per year
  over a seven-year life, and be salvaged for
  1000. Revelstokes before-tax MARR is 10, they
  are taxed at 40, and the binder has a 20 CCA
  rate. What is their exact after-tax IRR on this
  investment? Should the investment be made?