Q1

Part 1

NB: I have assumed the discount rate is 12% as it is not given.

PV of the CCA Tax Shield = Initial cost×CCA rate × Tax rate / (Discount rate + CCA rate) × (1

+ 0.5× Discount rate) / (1 + Discount rate) – (Salvage value× Tax rate × CCA rate / (Discount

rate + CCA rate) / ((1 + Discount rate)^Number of periods)

= ((560000*0.30*0.38)/(0.3 + 0.12)*(1 + 0.5*0.12)/(1+0.12)) -(30000*0.38*0.30/((0.12 +

0.30)*((1 + 0.12)^4)))

= $138,682.21

Part 2

A tax shield is a deduction allowed from the taxable income. Therefore, it causes the taxes owed

by a company to reduce. As a result, the CCA tax shield is considered a source of cash inflow

because tax shields cause the cash flow to rise as it enables the company to save some amount of

money. For instance, the company does not give tax on depreciation amount which results in a

reduction in cash outflow. The CCA tax shield keeps more money in a business, which can be

regarded as cash inflow.