Accelerated investment incentive applies

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Reference no: EM133326440

Case: Your company is upgrading to more efficient production equipment for your firm's only product. This upgrade was based on the recommendations of a consulting firm the company hired at a cost of $34,400. The new equipment will cost $1,975,000 and shipping costs of $32,100 will be incurred. Because the industry is changing rapidly, the equipment will be obsolete in 4 years so there will be no salvage value. The new equipment will allow you to make more of your product in the same amount of time. As a result your total sales will increase by $400,000 annually and expenses will decrease by $260,000 annually. Because your production will be increasing, inventory levels will need to be increased by $40,000 and accounts receivable will also increase by $30,000. Rather than paying your suppliers within 10 days, you will move to 30 day payments which will increase accounts payable by $20,000. The equipment will be depreciated for tax purposes at CCA rate of 20%. The company's tax rate is 40% and the company requires a rate of return of 7% on all capital expenditure projects. Assume the Accelerated Investment Incentive applies.

Determine the present value of the CCA tax shield (PVCCATS).

Reference no: EM133326440

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