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Unformatted text preview: realized from a taxable cash
receipt after income tax effects
have been considered is known
as the aftertax benefit.
Aftertax benefit
=
(net cash inflow) Managerial Accounting (1 – Tax rate) × Taxable cash receipt 1361 Capital Cost Allowance (CCA) Tax Shield While capital cost allowance
(CCA) is not a cash flow, it does
affect the taxes that must be
paid and therefore has an
indirect effect on a company’s
cash flows.
Tax savings from
the CCA tax
= Tax rate × CCA deduction
shield
Managerial Accounting 1362 CCA Tax Shield – An Example
Assume a company has annual cash sales and
cash operating expenses of $500,000 and
$310,000, respectively; a depreciable asset,
with no salvage value, on which the annual
straightline depreciation expense is $90,000;
and a 30% tax rate.
Tax savings from
the CCA tax
= Tax rate × CCA deduction
shield Managerial Accounting 1363 CCA Tax Shield – An Example
Assume a company has annual cash sales and
cash operating expenses of $500,000 and
$310,000, respectively; a depreciable asset,
with no salvage value, on which the annual
straightline CCA depreciation expense is
$90,000; and a 30% tax rate.
Tax savings from
the CCA tax
shield
$27,000 = Tax rate × CCA deduction = .30 × $90,000 The CCA tax shield is $27,000.
Managerial Accounting 1364 CCA Tax Shield – An Example
The answer can also be determined by
calculating the taxable income and income tax
for two alternatives—without the CCA
depreciation deduction and with the CCA
depreciation deduction. The CCA tax shield is
the same—$27,000. Managerial Accounting 1365 Present Value of CCA Tax Shields
• Capital cost allowance (CCA) is depreciation for tax
purposes
• Tax Shield on CCA = CCA × tax rate
• CCA is calculated on a declining balance basis. Each
year’s CCA is calculated as:
• Undepreciated Capital Cost (UCC) × CCA rate
• UCCt+1 = UCCt – CCAt
• In the year an asset is purchased, only a 1/2 year of CCA
can be deducted
• Present value of CCA tax shields:
• PV = [(Cdt/d + k)/(d + k) × (1 +.5k)/(1 + k)]
• Where: c = capital cost of asset; d = CCA rate; t = tax
rate; k = cost of capital Managerial Accounting 1366 Present Value of CCA Tax Shields
• When an asset is sold, and adjustment is needed to the
present value of the CCA tax shields.
• The adjustment is needed because the original calculation
(see previous slide) assumes an infinite stream of CCA
deductions (declining balance basis) and related tax
shields.
• When the asset is sold, the company loses the tax shields
on any proceeds received. The adjustment is:
(Sdt/d + k) × (1+ k)n
Where, s = salvage value; d = depreciation rate; t = tax
rate; k = cost of capital; n = year of disposal
Managerial Accounting 1367 Holland Company – An Example
Holland Company owns the mineral rights to
land that has a deposit of ore. The company
is deciding whether to purchase equipment
and open a mine on the property. The mine
would be depleted and closed in 10 years and
the equipme...
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 Spring '09
 R.DUCHARME

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