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Really Big Conglomerate (RBC)is considering acquiring POP,Inc. ,a smaller unsuccessful Internet firm.POP has outstanding tax loss carryforwards of $320 million from losses over the past six years.RBC has pre-tax income of $100 million per year,a cost of capital of 10%,and pays 21% in taxes.The Tax Cuts and Jobs Act of 2017 will limit RBC's ability to write off the carryforwards to 80% of RBC's annual pre-tax income.
-If RBC acquires POP,then the NPV of POP tax loss carryforwards to RBC is closest to:
A)$53 million.
B)$236 million.
C)$262 million.
D)$320 million.

Question

Quizplus · Accepted Answer

The NPV of the tax loss carryforwards is calculated by considering the present value of the tax savings RBC can achieve. RBC can use 80% of its $100 million pre-tax income, which is $80 million, to offset with the carryforwards. The tax savings per year is 21% of $80 million, which is $16.8 million. The carryforwards will last for $320 million / $80 million = 4 years. The NPV is the present value of these tax savings over 4 years at a 10% discount rate, which is closest to $53 million.

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