Pressco Case Study Essay

In reviewing the proposal presented by Pressco, Inc. to provide new mechanical drying equipment at a cost of $2.9 zillion I check casted the cash flow implications of the secure in terms of present value of the investiture and estimated resulting savings, as comfortably as possible alternatives to purchase, and the current political climate as it affects the barter issues of taxation and energy policy. Following this review, it is my recommendation that we enter into a decoct for the purchase of the equipment in question before the end of the twelvemonth for the hobby reasons. Currently, our tax prise is not particularly favorable.We have experienced approximately small reductions in the late 1970s, however the introduction of Supply-Side economics into mainstream policy indicates to a greater extent favorable rates as rumored atomic number 18 on the horizon, making this a better measure to spend m whizzy and reduce our n atomic number 53xempt income. The projected co st savings will not begin until we argon likely to be benefitting from a more favorable tax rate, permit us make more money when it costs us slight in terms of taxation. We be disbursement when spending is cheaper and making more money when making money is cheaper as well. I have provided additional detail on the options and my rationale below.Assessment of Investment Cash Flowspresumptuous purchase of the equipment for cash, at a total cost of $2.9 million, there are several possible scenarios to consider tax and depreciation rates stay as they are or changing and the loss or good continuation of the Investment impose Credit (ITC). Without providing an excess of detail here, those scenarios include a possible tax rate decrease from the current level of 46% to 34%, possible extension of depreciation to 7 years, and the possible raise for the ITC tax credit, as well as the possibility of Grandfathering the last 2 options. excess detail on these calculations and the possible permutations considered is available in supplement A.To summarize my findings, purchase options resulted in acquit present values ranging from $1.4 million to $1.9 million for a return on our investment over the beside 10 years. Assessing the likelihood of to each one option and assigning weight to each possibility is an inexact science, only if I believe it in marvellous that in the current political climate we will not deliberate both a reduction in the tax rate and an sum up in the length of time over which we are required to dishonor capital assets. I have assigned weightsto each option with this in mind, and have come up with an middling weighted estimate of the mesh present value of the investment of $1.7 million.Alternatives to PurchaseAs opposed to purchase new equipment, we could opt to maintain the equipment we currently have, which has an estimated service life of 11 years remaining. We could retain all of our claimed Investment Tax Credit for this purchase, w hich has 2 years of depreciation left, and would not be required to invest in any new training for our employees. We would recognize $31,000 in depreciation in present value terms, as well as save an estimated $200,000 in training costs and losses due to lower production during the information curve. I estimate these savings to be approximately one month of payroll to include both the time spent on training, and our reduced production as employees learn how to use the new equipment. Additional detail of this option is provided in Appendix B, C, & D. In conjunction with belongings the existing equipment, we would have the opportunity to make a different investment with the $2.9 million.Current Taxation EnvironmentThe current Congress and Presidential validation have made a number of changes to the business environment done taxation and associated regulations in the past several years. As such, it is important to consider as many likely and reasonable options as possible when eva luating the effects of taxes on capital purchases. With the election of President Regan, the previously more belt notion of Supply-Side Economics has begun to be implemented, starting first with the Economic recovery Tax spell of 1981, which in addition to other business incentives, accelerate depreciation for capital expenditures to 5 years. This provision was repealed the following year as part of the Tax Equity and Fiscal Responsibility actuate of 1982. We precept the back & forth over reducing tax rates and providing spending incentives to businesses again with the failed Tax Reform Act of 1983 which ultimately was rolled into the Tax Reform Act of 1984.It has become clear that the one thing we do know about the future situation of business tax is uncertain. Because of the besotted bias of the current Presidential administration towards lowering tax rates, I believe that it is likely we will experience a certain percentage point of relief in that area. However, it is mor e important thanever at this time that we not depend to heavily on benefits derived from more favorable tax treatment. As such, it is in our evoke to also determine if a attached project will produce a positive financial result, dismantle in less favorable taxation scenarios.Fuel Efficiency ConsiderationsOf the $560,000/year savings Pressco, Inc. has estimated we will enjoy as a result of acquire their equipment, $360,000 (or 64%) is allocated to go off- competency. Therefore, we must closely psychoanalyze the current climate skirt fuel efficiency. There are two components to considering the effect of fuel thriftiness the possibility of future tax incentives and/or penalties for fuel efficiency in manufacturing, and the bell of fuel. The most likely scenario for tax incentives to increase fuel efficiency will be in the form of credits for purchases, which by means of purchasing now we will likely not be able to pull in advantage of. Penalties for higher fuel consumption m ay be levied at a point in the not-too-distant future as the Federal governing body strives to both more comprehensively address environmental concerns, and regulate the price of fuel. We saw both of these in The Energy Policy and Conservation Act of 1975, and with the Highway Revenue Act of 1982, which temporarily increased the gasoline affect tax by $0.05 (an increase from $0.04 to $0.09).The Energy Policy and Conservation Act of 1975 established reserves of crude crude and gave the President the authority to holy aim maximum domestic production as well as ration and conservation measures in times of crisis. This is important because these measures are clear indicators of the inte backup the Federal Government is taking in reducing and stabilizing fuel prices. When looking at the history of fuel prices, I see that we are in a period of unusually high prices. It is of critical richness that we evaluate the likelihood of prices remaining this high for the life of the equipment in order to consider how much of the $360,000/year savings is credible in the long-term. From 1948 through the 1960s, the price of crude oil was fairly consistent with the price of inflation, but in 1973 as a result of the oil embargo, crude oil prices increased four-fold.Prices remained fairly stable at this level through the rest of the decade, increasing three-and-a-half-fold again with the war in Iran again disrupting production. Most recently, OPEC has been scoreless in setting production quotas low enough to stabilize prices, and they have again begun to drop. While we cannot expect prices to drop back to their 1971 levels, it is wise to examine the effect of lowered fuel prices on the overall investment value. cut back the savings attributed to fuel efficiency by 25% ($270,000/year) reduces the weighted average net present value of the investment to $1.5 million, and reducing those savings brings the net present value to $1.2 million. Still arguably viable, but less attract ive. suck in Appendix E & F for additional detail.ConclusionWhile the savings proposed by Pressco, Inc. may not be as great as anticipated by their marketing representative, we are still in a strong position to make this purchase with cash available and resume advantage of the cost savings. Even if the savings attributed to fuel efficiency are of what is projected, the equipment will still provide an investment value of over $1 million in excess of the purchase price. Additionally, even if our tax rate were to stay the same, we would continue to realize financial benefits, making this investment one that is based o more than mere speculation or salesmanship.