Let's assume the US tax rate is 35% on this income,

which means that under LIFO you're going to pay

$10.5 fewer taxes in 2010 and 2011.

So, those lower pretax income due to the higher Cost of

Goods Sold means lower taxes paid.

But then in 2012, when we have the LIFO liquidation, and your pretax income is

60 higher under LIFO, you end up paying an extra $21 of taxes.

So you might be thinking well, so what, you saved some taxes,

now you pay more later.

But if it's inflationary,

then a dollar today is worth more than a dollar in the future.

So, you'd rather save taxes now than save taxes in the future.

And we'll talk about time value and money more later in the course.

But an easy way to think about this is you could use LIFO,

save $10.50 of taxes in 2010.

Use those tax saving to buy a high performing stock,

which then returns the 10.5 plus, say, a 10% return on an investment.

So when you have to pay the extra taxes in 2012, you sell your investment,

you have plenty of cash to pay not only the taxes, but

you also get a return on the cash that you've invested over time.