Question

How a conpany can reduce tax from accepting a negative NPV investment

400words

Why reduce tax is one of reason an organization accept negative NPV investment ?

Answer 1

Well,

A company can reduce tax from accpeting a negetive NPV investment as ,

negetive NPV means there is no profit generated from the project , infact negetive cash flow is generated from the project. So , if any project is not giving any profit , then the compan will not have to pay any tax on loss. tehrefore it can compensate the loss occured from this project with the profit generated from other project which will allow company to reduce its overall tax liability which is to be paid by the organisation.

Generally , a situation arises in the company where it is working on a project which is highly profitable and subsequently on which the tax liability of the comapny will be high , therefore , in that situation , a comapny , in order to reduce its tax liability accpet a project with negetive NPV which will results in loss which will further help to set off its profit from this loss and ultimately reduce its tax liability.

Also , it may happen that while doing a project with negetive NPV will help the company in setting up a minimum milestones that can be used to track the internal performance of the company after investment.

Further it helps to analyse that which is the least negetive project out of all the negetive NPV projects available as a option.

Also , negetive NPV project might result in profit maximization bu results in higher shareholder's value , as it helps to reduce the tax on dividend which company has to pay on distributing the dividend after earning profit from the project.