Question

Grant and Marvin organized a new business as a corporation in which they own equal interests. The new business generated a $65,000 operating loss for the year. Use Appendix A. Required: Assume the corporation expects to generate $500,000 of income next year and has a 21 percent tax rate. Calculate the net present value of the future tax savings associated with the current year operating loss, using a 4 percent discount rate. (Do not round intermediate computations. Round your final answer to the nearest whole dollar amount.)

Answer 1

Answer:

The net present value of the future tax savings associated with the current year operating loss is:

= $13,650.

Explanation:

a) Data and Calculations:

Operating loss for the current year = $65,000

Expected income next year = $500,000

Income tax rate = 21%

N (# of periods)  1

I/Y (Interest per year)  4

PMT (Periodic Payment)  0

FV (Future Value)  500000

Results

PV = $480,769.23

Total Interest $19,230.77

Tax = $480,769.23 * 21%

= $100,961.53

Tax = ($480,769.23 - 65,000) * 21%

= $415,769.23 * 21%

= $87,311.53

Tax savings = $13,650 ($100,961.53 - 87,311.53)

or $65,000 * 21%

= $13,650

Answer 2

The net present value of the future tax savings associated with the current year operating loss will be $13650.

Based on the information given, one has to calculate the tax for both periods, this will be:

First tax = $489769.23 × 21%

= $100961.53.

The second tax will be:

= ($480769.23 - $65000) × 21%

= $87311.53

Therefore, the tax savings will be:

= $100961.53 - $87311.53

= $13650

Therefore, the net present value of the future tax savings is $13650.

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