Question

Grant and Marvin organized a new business as a corporation, generating a $65,000 operating loss for the year. The corporation expects to generate $500,000 of income next year with 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

To calculate the net present value of the future tax savings associated with the current year operating loss, calculate the present value of the tax savings and subtract the initial investment. The net present value is $13,173.

Step-by-step explanation:

To calculate the net present value of the future tax savings associated with the current year operating loss, we need to determine the present value of the tax savings and then subtract the initial investment. In this case, the operating loss of $65,000 is expected to generate a tax savings of $65,000 * 21% = $13,650 in the next year. To calculate the present value of this tax savings, we can use the formula:

Present Value = Future Value / (1 + Discount Rate)^Number of Periods

Given a discount rate of 4% and a single period, the present value of the tax savings is:

Present Value = $13,650 / (1 + 0.04)^1 = $13,173.08

To calculate the net present value, we subtract the initial investment ($13,173.08 - $0) and round to the nearest whole dollar amount, which is $13,173.