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Exercise 9-12 Cash Flow Implications of Tax Losses

Exercise 9-12 Cash Flow Implications of Tax Losses
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ACCOUNTING

MT425 / MT 425
Managerial Finance and Accounting
Kaplan University (KU Campus)

James Jiambalvo
Managerial Accounting, 4e
Hoboken, NJ: John Wiley & Sons.

Unit 7: Capital Budgeting and Other Long-Run Decisions

Chapter 9 Exercise 9-12 Cash Flow Implications of Tax Losses [LO 4] WesternGear.com is expected to have operating losses of $250,000 in its first year of business and $150,000 in its second year. However, the company expects to have income before taxes of $300,000 in its third year and $450,000 in its fourth year. The company’s required rate of return is 12 percent.

Required
Assume a tax rate of 40 percent and that current losses can be used to offset taxable income in future years. What is the present value of tax savings related to the operating losses in years 1 and 2?

 

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