© 2012 mcgrawhill ryerson ltd.chapter 9 -1 in canada, taxable income is based on a deduction...
TRANSCRIPT
© 2012 McGrawHill Ryerson Ltd. Chapter 9 -1
In Canada, taxable income is based on a deduction called Capital Cost Allowance (CCA):
Taxable Income = Revenues - Expenses - CCA ◦ The terms depreciation and CCA are often used
interchangeably
Capital Cost Allowance (CCA)◦ The amount of write-off on depreciable assets
allowed by Canada Revenue Agency against taxable income
Un-depreciated Capital Cost ◦ The balance remaining in an asset class that
has not yet been depreciated in that year
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© 2012 McGrawHill Ryerson Ltd. Chapter 9 -2
The tax savings arising from CCA is called the CCA tax shield
◦ For calculating CCA, assets are assigned to different asset classes. These classes have specified CCA rates
Sale of Assets Termination of Asset Pool
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© 2012 McGrawHill Ryerson Ltd. Chapter 9 -3
Intangible assets use a straight-line depreciation method for computing CCA
Most asset classes use a declining balance method for computing CCA.
◦ The tax shield generated by CCA generally has an infinite life.
◦ Projects typically have a finite life.
When computing NPV, we calculate the present value of the operating cash flow separately from the present value of the CCA tax shields
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© 2012 McGrawHill Ryerson Ltd. Chapter 9 -4
where:C= capital cost of asset acquired todayd= CCA rate for the specified asset classTC = firm’s tax rater = discount rateS = salvage value from sale of asset at the end of Year t
tCC
rdr
SdT
r
r
dr
CdT
1
1
1
5.01
The PV of the CCA Tax Shield is equal to
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© 2012 McGrawHill Ryerson Ltd. Chapter 9 -5
382,3950,2423,2755,1275,2after taxProfit
821,1588,1305,1945225,1(35%).Tax
203,5538,4728,3700,2500,3ProfitPretax
...612875250,1785,1550,2500,1equipment ofCCA
155,12576,11025,11500,10000,10Expenses
233,18364,17538,16750,15000,15Revenues
039,3678,1225214204575,2500,1in WC Change
0039,3717,4493,4279,4075,4500,1WC
00010Invest Cap
6543210Year
,
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© 2012 McGrawHill Ryerson Ltd. Chapter 9 -6
Operating Cash Flows excluding CCA tax shield:
Year 0 1 2 3 4 5Revenues 15,000 15,750 16,538 17,364 18,233- Expenses 10,000 10,500 11,025 11,576 12,155= Profit before tax 5,000 5,250 5,513 5,788 6,078- Tax @35% 1,750 1,838 1,930 2,026 2,127= Operating cash flow 3,250 3,412 3,583 3,762 3,951(excluding CCA tax shield)
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© 2012 McGrawHill Ryerson Ltd. Chapter 9 -7
Total Cash Flows excluding CCA tax shield:
Year 0 1 2 3 4 5 6Capital Investment -10,000Change in working capital -1,500 -2,575 -204 -214 -225 1,678 3,039CF from operations 3,250 3,412 3,583 3,762 3,951Total cash flows(excluding CCA tax shield) -11,500 675 3,208 3,369 3,537 5,629 3,039
PV @ 12% = $1,040
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© 2012 McGrawHill Ryerson Ltd. Chapter 9 -8
Present Value of the CCA tax shield:
366,2
12.01
1
3.012.0
35.03.00
12.01
12.05.01
3.012.0
35.03.0000,10
1
1
1
5.01
6
tCC
rdr
SdT
r
r
dr
CdT
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© 2012 McGrawHill Ryerson Ltd. Chapter 9 -9
Net present value =
total PV excluding CCA tax shield + PV of CCA tax shield = $1,040 + $2,366
= $3,406
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