You invest BRL 10 million in inventory for your Brazilian factory. You expect to make no further investment or disinvestment in inventory over the 5-year life of your project. You expect the inventory will retain its real value. Inventory costing is done on a LIFO (last in/first out) basis. Expected annual inflation in BRL is 8 percent. The Brazilian corporate income tax rate is 40 percent. If you plan on selling the inventory in five years, your expected tax liability on the sale is about ______.

Question

Quizplus · Accepted Answer

The correct answer is D. The expected tax liability on the sale is BRL1.9 million. The inventory is expected to retain its real value, so the expected inflation-adjusted value of the inventory in five years is BRL 10 million. The expected tax liability on the sale is 40% of the expected inflation-adjusted gain, which is BRL 1.9 million.

You Invest BRL 10 Million in Inventory for Your Brazilian