WesternGear.com is expected to have operating losses of $330,000 in its first ye

Question

WesternGear.com is expected to have operating losses of $330,000 in its first year of business and $257,000 in its second year. However, the company expects to have income before taxes of $380,200 in its third year and $630,000 in its fourth year. The company WesternGear.com is expected to have operating losses of $330,000 in its first year of business and $257,000 in its second year. However, the company expects to have income before taxes of $380,200 in its third year and $630,000 in its fourth year. The company Exercise 9-12 WesternGear.com is expected to have operating losses of $330,000 in its first year of business and $257,000 in its second year. However, the company expects to have income before taxes of $380,200 in its third year and $630,000 in its fourth year. The company's required rate of return is 12 percent. Assume a tax rate of 35 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?

Explanation / Answer

TAX SAVINGS IN YEAR 3 = 380200*35% =133070

TAX SAVINGS IN YEAR 4 = [(330000+257000)-380200]*35%= 72380

P.V OF TAX SAVINGS = 133070/(1.12^3) + 72380/(1.12^4)

=133070*0.7118 + 72380*0.6355=140717

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