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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