Question

4. A. Six years ago, the Zircon company purchased a long-term asset for $3,875,500. The asset has a 20% CCA rate. Recently, at the end of year six, Zircon sold the asset for 850,000. Given this information, determine the value of the terminal loss or recapture at the end of year six.

B. Zircon Company's effective tax rate is 26%. Calculate the value of the CCA tax shield for the third year (year 3).

btw, what are "effective tax rate" and "the CCA tax shield"?

Answer 1

purchase price	$ 3,875,500
CCA rate	20%
tenor	6.00
sales price =	$     850,000

Particular	Formula	years
		1	2	3	4	5	6
opening balance	last year’s closing balance	$ 3,875,500	$   3,487,950	$   2,790,360	$   2,232,288	$   1,785,830	$   1,428,664
depreciation	(20% * opening balance)	$     387,550	$ 697,590.00	$ 558,072.00	$ 446,457.60	$ 357,166.08	$ 285,732.86
closing value	opening balance - dep	$ 3,487,950	$   2,790,360	$   2,232,288	$   1,785,830	$   1,428,664	$   1,142,931

(For the 1^st year, CCA value is half of the actual amount.)

for year 3:
CCA value =	$                                 558,072
tax rate	26%
CCA tax shield=	value of depreciation * tax rate
	$                           145,098.72