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

To find the net present value of the future tax savings, one must calculate the tax savings by applying the tax rate to the expected future income and then discount it back to the present using the 4% discount rate. The NPV of the future tax savings is $100,961.

Step-by-step explanation:

The student is asking how to calculate the net present value (NPV) of the future tax savings associated with a current year operating loss. To compute the NPV, we need to multiply the future income by the tax rate to determine the tax savings and then discount it back to the present value using the given discount rate.

First, we calculate the future tax savings:

Tax savings = Future income × Tax rate
= $500,000 × 21%
= $105,000

Next, we discount the future tax savings to the present value using the formula:

Present value = Future value / (1 + Discount rate)number of periods
= $105,000 / (1 + 4%)
= $105,000 / 1.04
= $100,961 (rounded to nearest whole dollar)

The net present value of the future tax savings is $100,961.

Answer 2

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

= $13,650.

Step-by-step 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