In September 2008, the IRS changed tax laws to allow banks to utilize the tax lo

Question

In September 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield their future income from taxes (prior law restricted the ability of acquirers to use these credits). Suppose Fargo Bank acquires Covia Bank and with it acquires $ 83 billion in tax loss carryforwards. If Fargo Bank is expected to generate taxable income of $ 9 billion per year in the future, and its tax rate is 30 %, what is the present value of these acquired tax loss carryforwards given a cost of capital of 8 %? The present value of these acquired tax loss carryforwards is $ nothing billion. (Round to two decimal places.)

Explanation / Answer

Solution-

Acquired carry forward tax losses - $83 billion

Taxable income - $9 billion

Tax rate- 30%

Tax saving on Carry forward losses for 9 years -$9 billion *30%=$2.7 billion

Tax saving in year 10 =$2 billion *30%= $0.60 billion

Computation of present value of acquired carry forward tax losses-

Present value = 2.7*1/0.08 [1- 1/(1.08)^9] + 0.60/(1.08)^10

Present value = 2.7*12.5[1-0.5002] + 0.60*0.4632

Present value = 2.7*12.5*0.4998 +0.27792

Present value = $16.86825 + $0.27792= $ 17.14617 billions

Present value of tax loss carry forward=$17.15billions

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