Question

Working on Aswath's Fall 2009 Quiz 2...problem 1 in year 3...why is tax only 40? 40% tax on 150 EBIT is 60. With NOL for year 3 being 50 and Reinvestment being 50, why not just make the tax amount 50 to eliminate the NOL?

Answer 1

The NOL is used to reduce your taxable income from 150 to 100. You then pay 40% of the taxable income, which gives you 40 as taxes. I am not sure where you are getting 50.. and why that would eliminate the NOL.