Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:

-Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes?
A)4 years
B)7 years
C)5 years
D)2 years

Question

Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
 
-Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes?
A)4 years 
B)7 years 
C)5 years 
D)2 years

Quizplus · Accepted Answer

To determine when Luther Industries will first pay taxes, we need to calculate the amount of taxable income it will have after using up its tax loss carryforwards.

Since Luther has $70 million in tax loss carryforwards and earns $15 million per year in pre-tax income, it will be able to offset its income with the tax loss carryforwards for the first 4.67 years (rounded to two decimal places) $(70 million / $15 million per year = 4.67 years).

After that, it will have taxable income of $15 million per year, and assuming a tax rate of 35%, it will owe $5.25 million in taxes each year.

Therefore, Luther Industries will first pay taxes in 5 years (4.67 years of using tax loss carryforwards plus the next year with taxable income).

Use the Information for the Question(s)below