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Pressco Case

In: Business and Management

Submitted By sunghyunyang
Words 570
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Pressco Case
Apr 30. 2015

* Recommendation The management of Paperco would have to buy the new drying equipment via binding contracts before rumored tax legislation was passed * Problem When was the best situation to replace the old drying equipment of Paperco, Inc that would enable the company to avail greater cost savings? * Rationale for Decision The cost saving associated with implementing the new drying equipment was influenced by tax policy, fuel cost, economic outlook, and demand. The management of Paperco had following alternatives with regard to tax policy. * Alternative1. No change in tax legislation * Alternative2. Buy the new equipment before rumored tax legislation was passed * Alternative3. Buy the new equipment after rumored tax legislation was passed In alternative1, Paperco would continue to use a 5 year ACRS depreciation model with higher depreciation expense, receive the investment tax credit and be subject to 46% tax rate. In alternative2, Paperco would also continue to use a 5 year ACRS depreciation model and receive the investment tax credit, but be subject to 34% tax rate. Finally, in alternative3, Paperco would have to use a 7 year MACRS model with lower depreciation expense. Furthermore, Paperco wouldn’t receive the investment tax credit but would be subject to 34% tax rate. Net Present Value (NPV) of above alternatives was as followings. | Alternative1 | Alternative2 | Alternative3 | NPV | (21,205) | 119,722 | (110,239) | Appendix (excel file) contains the detail Net Present Value financial review and incorporates multiple factors including cash flows, investment tax credit, cost saving, tax effect from depreciation and salvage value. The management of Paperco would choose alternative2 because NPV of alternative2 was greater than other alternatives. In addition, although NPV of…...

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