Windpower Systems Maintenance Ltd

question 56

Essay

Windpower Systems Maintenance Ltd.purchased a CCA Class 10 (CCA rate of 30%)vehicle for $360,000.The vehicle was the only item in the Class 10 capital cost allowance pool.The vehicle is expected to generate net cash income, excluding any tax effects, in the amount of $70,000 per year.The company uses straight-line depreciation, estimates a 6 year useful life with a $40,000 salvage value for the new vehicle at the end of year 6.The marginal tax rate is 35% and the company's average tax rate is 25%.Management requires a rate of return of 15.0%.Assume that cash flows occur at the end of the year.Required:
a.What is the unamortized capital cost at the beginning of year 2 if the maximum capital cost allowance that is allowed is taken in the first year?
b.What is the net present value of the investment in the vehicle?

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Definitions:

Standardization

In psychological testing, the process by which one obtains and organizes test scores from various population groups, so that the results of a person’s completing a test can be compared to those of others of his or her gender, in his or her age group, and so on.

Population Groups

Categories of individuals, often distinguished by sociodemographic or genetic characteristics, used in the analysis of epidemiological and sociological research.

Test Scores

Quantitative measures used to evaluate and compare an individual’s knowledge or understanding in a specific area or subject.

Validity

The extent to which a concept, conclusion, or measurement is well-founded and corresponds accurately to the real world.