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← Series 79: Collection, Analysis & Evaluation of Data
Series 79 practice questionhardFinancial due diligence – tax attributes

During due diligence, a buyer identifies $30 million in net operating losses (NOLs) but estimates that IRC Section 382 will limit annual NOL usage to $3 million. What is the MAXIMUM present value of the NOL benefit, assuming a 21% corporate tax rate and a 10% discount rate?

  1. A$3,871,000✓ Correct answer
  2. B$6,300,000
  3. C$5,727,000
  4. D$6,900,000
Explanation

Why A — $3,871,000

Section 382 permits at most $3 million of NOL usage annually, creating a $630,000 annual tax benefit at a 21% tax rate. Using the stated simplifying assumption that the $30 million NOL is used evenly over 10 years and benefits arrive at each year-end, present value is $630,000 × [1 - (1.10)^-10] ÷ 10% ≈ $3.87 million.

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