Background

Advanced Chemical Industries $($ACl$)$ is a leading pharmaceutical company. ACl only operates in the US$.$

Excluding the deferred tax asset, ACl total assets are $$3\mathrm{.}5$ million. ACl was a profitable company. In $2018,$

ACl began reporting a net loss $($both book and tax loss$),$ which has been primarily attributable to significant

research and development costs.

Now it is $2020.$ The following table presents the loss figures for ACl. ACl's relevant statutory tax rate is $21\%$

and the company did not have any permanent book$-$tax differences during $2018,2019$ or $2020.$ ACl did not

establish a valuation allowance to offset the deferred tax asset in $2018$ or $2019.$

ACl is assessing the need to record a valuation allowance to offset the deferred tax asset balance created

by the net operating loss carryforward. While the company has reported losses in the past three years,

management anticipates positive income in the future. The executives of ACl do not anticipate any

fundamental shift in its business operations in the future. The company is currently in the final research and

development stage of a new drug that has tremendous market opportunity. Management believes that this

drug will be on the market within three years based on the company's past experience. The income

projections for the next five years prepared by the CFO are presented below.