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Learning Objectives. Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. (LO 4 )

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learning objectives
Learning Objectives
  • Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. (LO4)
  • Integrate the cash flows that result from an investment decision, including the after tax operating benefits and the tax shield benefits of capital cost allowance (amortization). (LO5)
  • Perform NPV analysis to assist in the decision-making process concerning long-run investments. (LO6)
capital cost allowance

LO5

Capital Cost Allowance
  • Amortization for income tax purposes
  • Capital Cost Allowance (CCA) is the maximum amount of amortization allowable under the tax act
  • Capital assets are divided into a number of classes (pools)
  • Each class is assigned a CCA rate;
    • ex. Class 8 is Machinery with a rate of 20%
  • CCA is calculated on the Un-depreciated Capital Cost (UCC) in the pool (declining balance)
  • CCA provides a tax shield over the life of the investment
  • A formula provides the present value of the CCA tax shield
table 12 10 liquidation of asset pool

LO5

Table 12-10Liquidation of Asset Pool

*Only original cost of $10,000 is deducted from pool; excess of $2,000 is capital gain