Pressco Essay

449 Words2 Pages
In November of 1985 Jane Rogers was trying to sell new mechanical drying equipment to Paperco, Inc. The reason for Paperco’s interest, they had been uninterested previously, was because of the rumor of new tax legislation that would eliminate the ITC, extend depreciation lives for new equipment, and reduce the corporate tax rate to 34%. My recommendation is that Paperco take Pressco up on their deal. Rationale The reason to take them up on the deal, is because you have to assume that the new tax legislation would be put into effect. This is simply because it is better to have the worst case scenario in mind. Ms. Rogers knew that the new legislation was worrying Paperco, and so she worked up a depreciation schedule using the terms of the new tax legislation for the new equipment. In addition, it turns out that, even with the new tax legislation, Paperco beats the system and would be “grandfathered” in if they sign before the tax legislation is passed. The NPV in this scenario would be greater than the other scenarios. Analysis The first scenario we would look at is one where Paperco does not take advantage of Pressco’s offer immediately, and only signs the contract to buy the equipment after the legislation has been put into place. In this scenario, the new equipment tax credit would be removed and a 7 years MACRS depreciation schedule would be used. The tax rate would be lowered from 46% to 34%. This would result in an NPV of 96,219.73. This is a positive NPV, so our initial thought would be that this is not too bad maybe it doesn’t matter if Paperco signs late. The second scenario to take a look at is one where Paperco signs a binding agreement before the legislation is passed, and is “grandfathered” in when the legislation passes shortly thereafter. We know they will be grandfathered in because Congress typically will do so if there is a
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