FACC 300 Study Guide - Quiz Guide: Taxation In Canada, Net Present Value, Operating Expense

• School: McGill University
• Department: Faculty Course
• Course: FACC 300
• Professor: Raad Jassim

Document Summary

Determine the capital tax factor for a class 24 asset with a tax rate of 45% and an interest rate of 12%. Class 24 is defined as straight-line depreciation at a rate of 50% a year. The word class" refers to the canadian tax system, which means the half-year rule applies. Thus, the depreciation schedule becomes yr1: 25%, yr2: 50%, yr3: 25% When an asset (capital) is purchased and depreciated, the depreciation charges provide future tax savings. Therefore, when we consider the after-tax cost of an asset, we need to take into account these tax savings. The percentage of the original cost that remains after the tax considerations is called the capital tax factor. Cost of asset pv of tax savings = after-tax cost. Ctf = after-tax cost / cost of asset. Ctf = (cost of asset pv of tax savings) /cost of asset. Ctf = 1 pv of tax savings /cost of asset.