Question: Q3.Headwaters Ltd. is considering purchasing a new asset. It has a cost of $1,500,000, an expected 6 year life and a salvage value of $90,000.

Q3.Headwaters Ltd. is considering purchasing a new asset. It has a cost of $1,500,000, an expected 6 year life and a salvage value of $90,000. The equipment would qualify as a class 8 (20% CCA) asset and Headwaters has a required rate of return of 12% and an effective tax rate of 35%.

Required:

Calculate the tax shields that are generated from the purchase of this asset. Assume the asset will be placed in a pool and the pool will continue upon disposition. For tax purposes the disposition will occur on day 1 of Year 7. What is the net tax effect of the asset acquisition?

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