Essay about Pressco Inc

1441 Words6 Pages
I: Statement of Financial Problem:
In November 1985 Paperco was presented with the critical business decision of replacing its existing mechanical drying equipment that had been originally placed into service in 1979 with more efficient equipment provided by Pressco, Inc. The consequences of this decision would have far reaching consequences as replacing the equipment could result in cost savings up to $560,000 annually. However, there were other critical factors to address before moving forward with the project.
One of the most important factors to consider was the rumored new tax legislation that would, “(1) eliminate the investment tax credit for new equipment; (2) extend depreciation lives for new equipment; and (3) reduce the
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Cash Outflows: * As stated in the assumptions, the equipment payment terms are as follows: 50% ($1,050,000) with order, December 1985; 50% ($1,050,000) upon start-up of facility, December 1986. Therefore we must account for those two transactions as cash outflows in years 1985 and 1986. Additionally, there is an $800,000 installation cost that will occur during December 1986, which must also be accounted for as a cash outflow in 1986. 2. Cash Inflows: * Tax shelter from depreciation of existing (old) equipment: i. In 1985 the cash inflow caused by the tax shelter from depreciation will be calculated using the existing 46% rate. In 1986 that tax rate will be reduced to 34% and the equipment will be sold that year so cash inflows from the old equipment will terminate that same year. * Tax shelter from depreciation of new equipment: ii. Since the new equipment will be installed in 1986, the new tax rate of 34% will be used to calculate cash inflows from the tax shelter from depreciation of the new equipment. This will continue through the allowed depreciation period of 7 years (1993) according to the Modified Accelerated Cost Recovery System (MACRS). * After tax impact of
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