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Calculation of Capital Cost Allowance with net profit, tax rate and weighted average cost of capital

Question

PAC Corp. is going to purchase a new line of technology. It will cost $4M and will be salvaged for $0.5M in six years. Due to the advanced nature of the technology, it can beclassified in one of two CCA categories, which have a CCA rate of 20% and 40%, respectively. Which CCA rate should you choose and what is the net benefit to the firm?  Assume that PAC Corp. has a marginal tax rate of 35% and a WACC of 6%.

Summary

The question belongs to Finance and it is about calculation of capital cost allowance with net profit, tax rate and weighted average cost of capital. An example of a company which is going to buy new line of technology has been given.

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    Giuseppe

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