Exam 8: Taxes

A Canadian company buys a capital asset for $100 000. The asset depreciates at 20% per year, and the half-year rule applies. Use of the asset brings in $5 000 a year in profit. If these are the company's only cash flows, what is the first year in which they have to pay taxes?

Suppose that the after-tax interest rate is 10%, and the corporate tax rate is 50%. What is the before-tax interest rate?

An oil company uses a technology which it purchased for $15 million. Operating costs are $2 million per year, and output is 1 000 barrels per day. Calculate the after-tax IRR given the following information: The corporate tax rate is 25%, the price of oil is $20 per barrel, the service life of the technology is 5 years and salvage value is $2 million. If the after-tax MARR is 15%, is this a good investment?

What is the difference between the CCA rate and the depreciation rate, and how do the two affect financial analysis?

A company buys 10 new computers every year for $1 200 each. They depreciate at 30% per year. After two years they are sold for their UCC value. The half-year rule applies. If the company pays taxes at 40% and has an after-tax MARR of 20%, what is the net present cost of buying and subsequently selling each computer?

SHMON Inc. wants to invest in future projects. The before-tax MARR is 14%. The after-tax MARR was found to be 7.4%. What is the corporate tax rate of the company?

Explain the problem of "writing-off" and how the introduction of the Half-Year Rule addressed this problem.

Why do businesses want to depreciate their assets as soon as possible?

A tax is progressive if

An asset is purchased for $100 000. It depreciates at 20% per year. After 10 years it will be sold for salvage for $10 700. If the company is taxed at 50% and has an after-tax MARR of 10%, what is the present worth of this sale in the year of purchase?

Sample CCA Rates and Classes are presented as follows: What does the number "20" in the CCA Rate column mean?

The capital tax factor (CTF)is a value that

SINCO Ltd. purchased a piece of equipment in 2000. The UCC amounts for this equipment are given in the following table: How much could SINCO Ltd. claim as CCA in 2002 assuming there were no purchases or dispositions during that year (within that class)?

The before-tax MARR is

An engineering construction company purchased an excavator for $200 000 in 1999 and a bulldozer for $180 000 in 2000. The UCC for the changes in asset holdings due to the purchases of an excavator are as follows: How much tax savings could the company accumulate due to the CCA by the end of 2000 if the corporate tax rate is 50%?

Numerically the relationship between the CTF and the CSF is as follows:

Explain the main objective of the Canadian Capital Cost Allowance system and its basic assumptions.

GEMTECH Ltd. is an engineering construction company. It purchased an excavator for $200 000 in 1999 and a bulldozer for $180 000 in 2000. The UCC for the changes in asset holdings due to the purchases of an excavator are as follows: How much could the GEMTECH Ltd. claim as CCA in 2000?

A manufacturing company bought a truck for $35 000. After 10 years the truck's salvage value will be $5 000. The truck is expected to produce a revenue of $10 000 per year, while maintenance costs are expected to be $1 000 per year. If the annual interest rate is 10%, the corporate tax rate is 35% and straight-line depreciation is applied, what amount of taxes associated with the truck's operation will the company pay in the first year?

New Brunswick Metalworks is evaluating a $100 000 polishing machine (CCA class 8). Services provided by the machine are expected to bring $15 000 per year in value over the next five years. Operating costs are expected to be $1 000 per year. Calculate the amount of taxes paid in each of the next five years of service life under the corporate tax rate of 40%.