Pressco Case Study Essay

In reviewing the proposal presented by Pressco, Inc. to provide new mechanical drying equipment at a m unrivalledtary look upon of $2.9 million I have considered the specie flow implications of the corrupt in terms of present appreciate of the fit outment and estimated resulting savings, as fountainhead as possible alternatives to purchase, and the menstruum political clime as it affects the transaction issues of tax r regularueation and energy policy. Following this review, it is my recommendation that we enter into a contract for the purchase of the equipment in inquiry before the end of the social class for the following reasons. Currently, our tax rate is non particularly well-heeled.We have experienced some small(a) reductions in the late 1970s, however the introduction of Supply-Side economics into mainstream policy indicates much favorable rates as rumored be on the horizon, making this a better time to spend property and reduce our taxable income. The projecte d cost savings entrust not begin until we are seeming to be benefitting from a more favorable tax rate, letting us make more coin when it costs us less in terms of taxation. We are spending when spending is cheaper and making more money when making money is cheaper as well. I have provided additional dilate on the options and my principle below.Assessment of Investment Cash FlowsAssuming purchase of the equipment for cash, at a total cost of $2.9 million, in that respect are several possible scenarios to consider tax and depreciation rates remaining as they are or changing and the loss or continuation of the Investment measure Credit (ITC). Without providing an excess of detail here, those scenarios include a possible tax rate decrease from the real level of 46% to 34%, possible extension of depreciation to 7 years, and the possible repeal for the ITC tax credit, as well as the possibility of Grandfathering the last two options. Additional detail on these calculations and th e possible permutations considered is available in vermiform process A.To summarize my findings, purchase options resulted in net present values ranging from $1.4 million to $1.9 million for a lessen on our investment over the next 10 years. Assessing the likelihood of each option and assigning weighting to each possibility is an inexact science, but I believe it in unlikely that in the current political climate we will not see both a reduction in the tax rate and an join on in the length of time over which we are required to depreciate ceiling assets. I have assigned weightsto each option with this in mind, and have come up with an honest weighted estimate of the net present value of the investment of $1.7 million.Alternatives to PurchaseAs opposed to buying 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, which has two 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 abase production during the apprehending curve. I estimate these savings to be approximately one calendar 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 charge the existing equipment, we would have the opportunity to make a different investment with the $2.9 million.Current Taxation purlieuThe current Congress and Presidential administration have made a number of changes to the business purlieu through taxation and associated regulations in the past several years. As such, it is important to consider as legion(predicate) likely and reasonable options as possible when evaluating the effects of taxes on capital purchases. With the election of President Regan, the previously more fringe notion of Supply-Side Economics has begun to be implemented, starting first with the Economic Recovery Tax Act of 1981, which in addition to other business incentives, accelerated depreciation for capital expenditures to 5 years. This proviso was repealed the following year as part of the Tax Equity and Fiscal Responsibility Act of 1982. We adage the back & forth over reducing tax rates and providing spending incentives to businesses over over again with the failed Tax reclaim Act of 1983 which ultimately was rolled into the Tax Reform Act of 1984.It has become clear that the one subject we do kat once about the future tense situation of business tax is uncertain. Because of the strong bias of the current Presidential administration towards lowering tax rates, I believe that it is likely we will experience a certain degree of relief in that area. However , it is more 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 interest to in any case determine if a given project will produce a positive financial result, even in less favorable taxation scenarios.Fuel Efficiency ConsiderationsOf the $560,000/year savings Pressco, Inc. has estimated we will make whoopie as a result of purchasing their equipment, $360,000 (or 64%) is allocated to give the sack-efficiency. Therefore, we must closely examine the current climate surrounding fuel efficiency. There are two components to considering the effect of fuel economy the possibility of future tax incentives and/or penalties for fuel efficiency in manufacturing, and the toll of fuel. The most likely scenario for tax incentives to increase fuel efficiency will be in the form of credits for purchases, which through buying now we will likely not be able to take advantage of. Penalties for higher fuel outla y may be levied at a point in the not-too-distant future as the federal political science 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 gun excise tax by $0.05 (an increase from $0.04 to $0.09).The Energy Policy and Conservation Act of 1975 established reserves of crude oil and gave the President the authority to order maximum domestic production as well as rationing and conservation measures in times of crisis. This is important because these measures are clear indicators of the interest 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 splendour that we evaluate the likelihood of prices remaining this high for the life of the equipment in ord er 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 middling 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 beenunsuccessful in setting production quotas low enough to stabilize prices, and they have again begun to drop. bit 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. Reducing the savings attributed to fuel efficiency by 25% ($270,000/year) reduces the weighted come net present value of the investment to $1.5 million, and reducing those savings brings the net present value to $1.2 million. shut away arguably viable, but less attracti ve. See 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 take 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.