Time Value of Money

A sum of money is worth more now than the same sum will be worth in the future. Main reasons are Inflation and opportunity cost.

Assets: Everything you own which has value: infrastructure, patents, bonds, stocs, commodities. They have a random value over time $S_t$.

$B(\tau )=B(t)\times \exp \{r(\tau -t)\}$

Depreciation

In Canada, depreciation is NOT tax deductible. Instead the CRA allows a Capital Cost (initial investment) Allowance which provides a “tax-shield” which reduces EBIT and thus taxes.

Every year, the undepreciated capital cost (UCC) is reduced by the CCA rate which depends on the class of the asset at hand (ie $10,10\ast (1-r),10\ast (1-r{)}^2$), for instance cars may have a CCA rate higher than warehouses.

And from that UCC we take a tax rate to get the actual tax shield amount: amount to be deducted from EBIT.

PVCCATS : Present Value of Capital Cost Allowance Tax shield.

The CCA tax shields must be calculated in nominal terms, since once the asset is purchased, the entire CCA table is determined REGARDLESS of future inflation.

Inflation

$(1+Nominal)=(1+Real)\times (1+Inflation)$