38) Managerial Financial Accounting Assignments AE9-12 Solution

# 38) Managerial Financial Accounting Assignments AE9-12 Solution

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AE9-12

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Incorrect. Cash Flow Implications of Tax Losses [LO 4] WesternGear.com is expected to have operating losses of \$300,000 in its first year of business and \$200,000 in its second year. However, the company expects to have income before taxes of \$350,000 in its third year and \$525,000 in its fourth year. The company’s required rate of return is 14 percent. 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? (Round present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and final answer to 0 decimal places, e.g. 5,252.)
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Unformatted text preview: Present Value \$[no answer] Click here if you would like to Show Work for this question AE9-12 Year Income (Loss) 1 (\$300,000) 2 (200,000) 3 350,000 4 525,000 The \$300,000 loss in year 1 will offset income in year 3 resulting in a tax savings of \$120,000 (i.e., \$300,000 x 40% tax rate) in year 3. With respect to the \$200,000 loss in year 2, \$50,000 of it can be used to offset income in Year 3 (resulting in a tax savings of \$20,000 in Year 3) and \$150,000 of it can be used to offset income in year 4 (resulting in a tax savings of \$60,000 in year 4). Cash Flow Present Value Factor Total \$120,00 0.6750 \$81,000 20,000 0.6750 13,500 60,000 0.5921 35,526 \$ 130,026...
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## This note was uploaded on 06/21/2011 for the course MANAGERIAL MT425 taught by Professor Hodgson,k during the Spring '11 term at Kaplan University.

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38) Managerial Financial Accounting Assignments AE9-12 Solution

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