A five-year project requires an initial capital investment of $600,000 and an initial
net working capital investment of $30,000. The project is expected to provide pre-
tax operating revenue of $400,000 per year. The associated pre-tax operating
costs are expected to be $175,000 per year. The capital asset belongs to Class 7
and has a CCA rate of 15 percent. The asset is not expected to have any salvage
value. The working capital investment can be fully recovered at the end of the
project. The firm’s marginal tax rate is 40 percent and cost of capital is 10
percent. (Assume the CCA pool remains open and that there are no capital
gains/losses.)
5. Based on the above information, what is the present value of the CCA tax shield?

To find the **Present Value (PV) of the CCA tax shield**, we'll follow these steps:

### 1. **Depreciation (CCA) Calculation**
Since the capital asset belongs to Class 7 and has a **Capital Cost Allowance (CCA) rate of 15%**, the CCA for each year is based on the **Undepreciated Capital Cost (UCC)**, which declines each year.

The CCA tax shield is calculated based on the yearly CCA deductions and the tax rate.

### 2. **Formula for Present Value of the CCA Tax Shield**

The **Present Value of the CCA tax shield** can be calculated using the following formula (as the pool remains open and depreciation continues indefinitely):

\[
PV \, \text{of CCA tax shield} = \frac{\text{CCA rate} \times \text{Initial Capital Investment} \times \text{Tax Rate}}{\text{CCA rate} + \text{Cost of Capital}}
\]

Where:
- **Initial Capital Investment** = $600,000
- **CCA rate** = 15% or 0.15
- **Tax rate** = 40% or 0.40
- **Cost of Capital** = 10% or 0.10

### 3. **Substituting the values:**

\[
PV \, \text{of CCA tax shield} = \frac{0.15 \times 600,000 \times 0.40}{0.15 + 0.10}
\]

\[
PV \, \text{of CCA tax shield} = \frac{0.15 \times 600,000 \times 0.40}{0.25}
\]

\[
PV \, \text{of CCA tax shield} = \frac{36,000}{0.25} = 144,000
\]

### 4. **Conclusion**

The **Present Value of the CCA tax shield** is **$144,000**.

---

Would you like to discuss how this impacts the overall project valuation or need details on how the formula works? 

Here are some related questions to consider:

1. How does the CCA rate affect the overall tax shield?
2. What is the impact of the firm's tax rate on the present value of the CCA tax shield?
3. How does extending or shortening the project duration affect this calculation?
4. Would the salvage value, if any, affect the CCA pool and tax shield?
5. How would a change in the cost of capital affect the present value of the CCA tax shield?

**Tip:** The CCA tax shield helps lower the effective cost of capital investment by reducing taxable income.

A five-year project requires an initial capital investment of $600,000 and an initial net working capital investment of $30,000. The project is expected to provide pre-tax operating revenue of $400,000 per year. The associated pre-tax operating costs are expected to be $175,000 per year. The capital asset belongs to Class 7 and has a CCA rate of 15 percent. The asset is not expected to have any salvage value. The working capital investment can be fully recovered at the end of the project. The firm’s marginal tax rate is 40 percent and cost of capital is 10 percent. (Assume the CCA pool remains open and that there are no capital gains/losses.) What is the present value of the CCA tax shield?

Find the present value of the CCA tax shield for a $600,000 capital investment in a five-year project with a CCA rate of 15%, a marginal tax rate of 40%, and a 10% cost of capital. Learn how depreciation impacts the tax shield and how to apply financial formulas for long-term project evaluation.

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