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:

Lawn Service

A business that provides maintenance services for lawns and gardens, including mowing, fertilizing, and weed control.

Office Grounds

The outdoor area or surroundings of an office building, which can include landscaping, parking lots, and other external features.

Administrative Expense

Costs related to the general administration of a company, including expenditures such as executive salaries, office supplies, and legal and financial services.

Period Cost

Expenses that are not directly tied to production and are therefore expensed in the period they are incurred.