On The part (B), I am not sure if the tax=0 or tax=35% x (-10,200,000) becasue the pretax profit is negative (-10,200,000). Does anyone know about it ? In other words, does the company get tax back if the profit is negative ? Thanks.
[NEAS: The firm pays taxes on corporate income. If one project makes $100,000 pre-tax, the firm pays $35,000 on taxes on that project. If a second project losses $100,000 pre-tax, the firm pays nothing in total. It implicitly pays $35,000 on the first project and gets a refund of $35,000 on the second project.
If the firm loses money in total, it can carry back an operating loss to recoup taxes paid in the past two years. If it did not pay taxes in the past two years, it can carry forward its net operating losses up to five years to reduce future taxes.
We assume the firm can use operating losses on a project to offset income elsewhere, so it receives an implicit tax refund. Advanced finance courses discuss the effects of carry backs, carry forwards, and the possibility of not being able to use tax credits.]