Final answer:
The proper formula to determine the present value of CCA deductions on capital expenditures involves the basic present value formula with adjustments for the specifics of the CCA system. Using the basic formula, Present Value = $1 / (1 + discount rate)ᵗ, is a starting point but CCA's declining balance nature must be factored in for accurate calculations.
Step-by-step explanation:
The correct formula for the present value of CCA (Capital Cost Allowance) deductions on $1 spent on capital is not provided in options A, B, C, or D directly. However, the fundamental principle in calculating the present value of any future cash flows or deductions is typically option B, which is represented as Present Value = $1 / (1 + r)ᵗ, where r is the discount rate and t is the time period.
To apply this to the context of CCA deductions, you need to adjust the formula according to the specifics of the tax system and the applicable CCA rate for the class of assets. Generally, CCA deductions are not received all at once, but rather they are received over the useful life of the asset, requiring a different calculation technique that takes into account the declining balance method used for CCA calculations. Therefore, while option B shows the basic principle of present value calculations, you must take into account the unique aspects of CCA to get the correct figure for present value of CCA deductions.
If we consider present value calculations as shown in the example for bonds, we see that calculating the present discounted value of future profits involves applying a formula to each benefit that will be received at a future date, and then adding up all the present values for the different time periods to get a final answer. As shown in the example with an 8% discount rate, the present value calculation would be: $240/(1+0.08)¹ = $222.20 for the first year's interest payment and $3,240/(1+0.08)² = $2,777.80 for the second year's interest plus principal payment.