1. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -1  In Canada, taxable income is based on a deduction called Capital Cost Allowance (CCA): Taxable Income = Revenues - Expenses - CCA ◦ The terms depreciation and CCA are often used interchangeably  Capital Cost Allowance (CCA) ◦ The amount of write-off on depreciable assets allowed by Canada Revenue Agency against taxable income  Un-depreciated Capital Cost ◦ The balance remaining in an asset class that has not yet been depreciated in that year LO3

2. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -2  The tax savings arising from CCA is called the CCA tax shield ◦ For calculating CCA, assets are assigned to different asset classes. These classes have specified CCA rates  Sale of Assets  Termination of Asset Pool LO3

3. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -3  Intangible assets use a straight-line depreciation method for computing CCA  Most asset classes use a declining balance method for computing CCA. ◦ The tax shield generated by CCA generally has an infinite life. ◦ Projects typically have a finite life.  When computing NPV, we calculate the present value of the operating cash flow separately from the present value of the CCA tax shields LO3, LO4

4. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -4 where: C= capital cost of asset acquired today d= CCA rate for the specified asset class TC = firm’s tax rate r = discount rate S = salvage value from sale of asset at the end of Year t The PV of the CCA Tax Shield is equal to LO3, LO4

5. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -5 LO3, LO4

6. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -6  Operating Cash Flows excluding CCA tax shield: LO3

7. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -7  Total Cash Flows excluding CCA tax shield: PV @ 12% = $1,040 LO3

8. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -8  Present Value of the CCA tax shield : LO3

9. © 2012 McGrawHill Ryerson Ltd.Chapter 9 -9  Net present value = total PV excluding CCA tax shield + PV of CCA tax shield = $1,040 + $2,366 = $3,406 LO3