Use the following information to answer the question(s)below.
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,in what year will RBC completely use up the tax loss carryforward?
A)2 years
B)3 years
C)4 years
D)5 years

Question

Quizplus · Accepted Answer

RBC's 80% limit of the carryforwards is $80 million per year ($100 million x 0.80). 
RBC will pay taxes on the remaining $20 million pre-tax income ($100 million - $80 million) at 21%, which is $4.2 million.
So, RBC's net income will be $95.8 million ($100 million - $4.2 million).
It will take 4 years to use up POP's $320 million loss carryforward, which is $80 million per year ($320 million ÷ 4 years).

Use the Following Information to Answer the Question(s)below