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    Tax Loss Carry Forward

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    The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for $3 million. Kent has a $700,000 tax loss carry forward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30%. Kent will provide the $420, 000 per year in cash flow (after tax income plus depreciation) for the next 20 years. If the Clark Corporation has a cost of capital of 13%, should the merger be undertaken?

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    Solution Preview

    We need to calculate the NPV of the project to decide the action. Kent will provide $420,000 per year for 20 years. We need to find the present value of this stream of cash flow. Since this is an ...

    Solution Summary

    The solution explains how to evaluate a merger if the acquired company has tax loss carry forward.