A Canadian airline, Biggles Air, just bought a new plane for five million dollar

Question

A Canadian airline, Biggles Air, just bought a new plane for five million dollars. It’s a Class 9 asset, which means that Revenue Canada considers it to depreciate at 25% per annum. However, in reality the plane is wearing out, and losing value, at 35% per annum, and the salvage price Biggles will be able to get for it reflects this depreciation rate. Biggles’s after-tax MARR is 10% and the corporate tax rate is 40%.

What is the after-tax present worth of the salvage price Biggles Air can expect to get for the plane when they sell it in five years time, taking into account the terminal loss?

Explanation / Answer

Written Down Value of Asset at the end of 5th Year @ 25 Pc Deprecion $772382

Written Down Value of Asset at the end of 5th Year @ 35 Pc Deprecion $580145

                                                                                    Loss on sale $192237

Workings : Calcultation Depreciation and WDV Years Asset Cost Depreciation Rate @35 % Written down Value 1 5000000.0 1750000 3250000 2 3250000.0 1137500 2112500 3 2112500.0 739375 1373125 4 1373125.0 480594 892531 5 892531.3 312386 580145 Years Asset Cost Depreciation Rate @25 % Writted down Value 1 5000000.0 1250000.0 3750000.0 2 3750000.0 937500.0 2812500.0 3 2812500.0 984375.0 1828125.0 4 1828125.0 639843.8 1188281.3 5 1188281.3 415898.4 772382.8

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