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Present value of tax savings

WesternGear.com is expected
to have operating losses of $250,000 in its first year of business and $150,000 in its second year. However, the company expects to have income before taxes of $300,000 in its third year and $450,000 in its fourth year.The companyĆ¢??s required rate of return is 12 percent.

Required
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?

Solution Preview

The tax shield will occur in year 3 and 4 when the operating losses are set off against the income. In year 3, the loss of $300,000 ...

Solution Summary

The solution explains the calculation of present value of tax savings relating to prior operating losses

$2.19