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Unformatted text preview: loss can be used only to offset capital
gains. In either case, the loss will save the firm $7,200 ($18,000 0.40) in taxes.
And, if current operating earnings or capital gains are not sufficient to offset the
loss, the firm may be able to apply these losses to prior or future years’ taxes.6 Change in Net Working Capital7
net working capital
The amount by which a firm’s
current assets exceed its current
liabilities. Net working capital is the amount by which a firm’s current assets exceed its current liabilities. This topic is treated in depth in Chapter 14, but at this point it is
important to note that changes in net working capital often accompany capital
expenditure decisions. If a firm acquires new machinery to expand its level of
operations, it will experience an increase in levels of cash, accounts receivable,
inventories, accounts payable, and accruals. These increases result from the need 6. As noted in Chapter 1, the tax law provides detailed procedures for using tax loss carrybacks/carryforwards.
Application of such procedures to capital budgeting is beyond the scope of this text, and...
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This document was uploaded on 01/19/2014.
- Fall '13