# Follett Enterprises has purchased three greenhouses over the past five years, but today it sold them all

## Question:

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.

Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

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**Related Book For**

## Foundations of Financial Management

**ISBN:** 978-1259024979

10th Canadian edition

**Authors:** Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta