Follett Enterprises has purchased three greenhouses over the past five years, but today it sold them all for $500,000. Five years ago, Follett purchased the first greenhouse for $300,000, two years later it purchased the second for $250,000, and last year it purchased one for $400,000. Follett Enterprises has a marginal tax rate of 30 percent. CCA on greenhouses is 10 percent.
a. Calculate the tax shields and any taxes payable to Follett on an annual basis over the five-year period resulting from these investments.
b. Assuming the asset pool continues, calculate the tax shields on an annual basis over the five-year period.
c. Calculate the present value of the tax shields and any taxes payable under the assumptions of part a and b. Calculate the present value of the CCA tax shields with formula 12-1 and compare your results. Follett's cost of capital is 14 percent.