Headwaters Ltd

question 144

Essay

Headwaters Ltd.is considering purchasing a new asset.It has a cost of $1,350,000, an expected 6 year life and a salvage value of $90,000.The equipment would qualify as a class 8 (20% CCA)asset and Headwaters has a required rate of return of 11% and an effective tax rate of 32%.Required:
Calculate the tax shields that are generated from the purchase of this asset.Assume the asset will be placed in a pool and the pool will continue upon disposition.For tax purposes the disposition will occur on day 1 of Year 7.What is the net tax effect of the asset acquisition?

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Definitions:

Short-run Equilibrium

Short-run Equilibrium occurs in a market when the quantity supplied equals the quantity demanded at a specific price level, without considering changes in the long run.

Market Participants

Individuals or entities engaging in the buying, selling, or exchange of goods and services in a market.

Standardized

Established to have uniform procedures, dimensions, materials, or tests, to ensure consistency and comparability across different entities or products.

Economic Profits

The excess of total revenue over total costs, including both explicit and implicit costs, in economics.