1. The mechanics of PV(CCATS) calculation
Lecture 7
The mechanics of
PV(CCATS)
calculation

2. PV(CCATS) formula where C = Initial cost of the fixed asset
d = CCA rate on the asset class
T = marginal corporate tax rate
k = required return on the project
S = salvage value of the asset at the end of the project
N = length of the project’s life

3. Numerical Example
We have a project that requires investment in assets of $1 million. The assets have a CCA rate of 30%, and a life of 8 years. At the end of the 8th year, the assets can be sold for $50,000. If the marginal corporate tax rate is 40% and the required rate of return on this project is 15%, what is the present value of the CCA tax shields?

4. Step 1: Write down known numbers

5. Step 2: Plug known numbers into PV(CCATS) formula

6. Step 3: Calculate in blocks

7. Step 4: Calculate PV(CCATS)

8. Practice makes easy as pie
Try this example on for size: C = $500,000 d = 30% T = 35% k = 10% S = $60,000 N = 10 years What is the PV(CCATS)? Check Answer: $119,211.78