Chapter 7

Chapter 7 - McGill Faculty of Engineering MIME 310...

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1 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials Chapter 7. Taxation Considerations

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2 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 7.1 Determine the value of the capital tax factor for a Class 24 asset (i.e. depreciated by the straight-line method at an annual rate of 50 percent with applicable half-year rule). Assume a combined federal-provincial income tax rate of 45 percent and a cost of capital of 12 percent. Class 24 : SL depreciation @ 50%; with the half-year rule, this becomes 25%/50%/25%. After-tax cost: 1 - 0.3599 = 0.6401 Î CTF = 0.6401 This value can be obtained with the CTF relationship for SLD: CTF = 1 - [ t d (P/A,12%, 2 ) ] [ (1 + i/2) / (1 + i) ] The determination of the tax factor is based on a capital expenditure of \$1, which would be depreciated by \$0.25 in the first year, \$0.50 in the second, and \$0.25 in the third. Based on deprecia- tion period associ- ated with d = 1 - [ (0.45) (0.50) (1.6901) ] [1.06 / 1.12] = 1 - 0.3803 (0.9464) = 0.6401 0.1125 / 1.12 3 0.25 (0.45) 0.25 3 0.45 1.00 Total 0.2250 / 1.12 2 0.50 (0.45) 0.50 2 0.1125 / 1.12 1 0.25 (0.45) 0.25 1 PV (Tax saving) Tax Saving Depreciation Year 0.1004 0.1794 0.0801 0.3599
3 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 7.2 If a Class 24 asset is purchased for \$10 000 and is then resold for \$5000 after three years of use, what is its net after-tax cost (i.e. equivalent cost at time of purchase, net of salvage value)? CTF:

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Chapter 7 - McGill Faculty of Engineering MIME 310...

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