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Learning Objectives

Learning Objectives. Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. (LO 4 )

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Learning Objectives

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  1. Learning Objectives • Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. (LO4) • Integrate the cash flows that result from an investment decision, including the after tax operating benefits and the tax shield benefits of capital cost allowance (amortization). (LO5) • Perform NPV analysis to assist in the decision-making process concerning long-run investments. (LO6)

  2. LO5 Capital Cost Allowance • Amortization for income tax purposes • Capital Cost Allowance (CCA) is the maximum amount of amortization allowable under the tax act • Capital assets are divided into a number of classes (pools) • Each class is assigned a CCA rate; • ex. Class 8 is Machinery with a rate of 20% • CCA is calculated on the Un-depreciated Capital Cost (UCC) in the pool (declining balance) • CCA provides a tax shield over the life of the investment • A formula provides the present value of the CCA tax shield

  3. LO5 Capital Cost Allowance: tax savings

  4. LO5 Table 12-8Some declining balance CCA classes

  5. LO5 Table 12-9Capital Cost Allowance for investment A or B

  6. LO5 Table 12-10Liquidation of Asset Pool *Only original cost of $10,000 is deducted from pool; excess of $2,000 is capital gain

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