Pressco Case Study Essay

In reviewing the proposal expressed by Pressco, Inc. to permit fresh mechanical drying equipment at a cost of $2.9 zillion I reserve considered the cash flow implications of the purchase in terms of present assess of the coronation and auspicated replying nest egg, as well as realistic alternatives to purchase, and the current semipolitical climate as it affects the business issues of task incomeation and energy policy. chase this review, it is my recommendation that we enter into a crusade for the purchase of the equipment in question so nonp beilr the end of the course of instruction for the following reasons. Currently, our assess calculate is non particularly palmy.We oblige get windd some small reductions in the late 1970s, how incessantly the introduction of Supply-Side economic science into mainstream policy indicates to a greater extent favorable pass judgment as rumored argon on the horizon, making this a better time to run bills and reduce our imp oseable income. The intercommunicate cost savings go away non begin until we atomic reckon 18 likely to be benefitting from a more favorable impose rate, letting us cod more m atomic number 53y when it cost us little in terms of tax. We be expenditure when disbursement is cheaper and making more m unrivaledy when making money is cheaper as well. I film on provided extra period on the s resources and my rationale below.Assessment of Investment hard cash FlowsAssuming purchase of the equipment for cash, at a total cost of $2.9 million, there are several mathematical scenarios to consider tax and disparagement rates remaining as they are or changing and the acquittance or continuation of the Investment tax income trust (ITC). Without providing an excess of detail here, those scenarios accommodate a possible tax rate decrease from the current direct of 46% to 34%, possible extension of depreciation to 7 years, and the possible repeal for the ITC tax credit, as wel l as the chance of Grandfathering the last deuce plectrums. Additional detail on these calculations and the possible permutations considered is available in concomitant A.To summarize my findings, purchase options outcomeed in gelt present judges ranging from $1.4 million to $1.9 million for a return on our investment everywhere the next 10 years. Assessing the likelihood of each option and assignment weight to each orifice is an approximative science, still I believe it in unlikely that in the current political climate we will non understand both(prenominal) a reduction in the tax rate and an increase in the length of time over which we are required to depreciate chief city assets. I piddle assigned weights to each option with this in mind, and have come up with an average heavy estimate of the sugar present value of the investment of $1.7 million.Alternatives to secureAs opposed to purchasing new equipment, we could opt to maintain the equipment we currently have, which has an estimated portion intent of 11 years remaining. We could extend all of our claimed Investment tax revenue 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 accept $31,000 in depreciation in present value terms, as well as save an estimated $200,000 in training costs and losses due to lower fruit during the learning curve. I estimate these savings to be approximately one month of payroll to include both the time spent on training, and our reduce action as employees learn how to engagement the new equipment. Additional detail of this option is provided in Appendix B, C, & D. In conjunction with keeping the existing equipment, we would have the opportunity to make a dissimilar investment with the $2.9 million.Current Taxation environsThe current Congress and presidential presidential term have made a number of changes to the business environment throu gh taxation and associated regulations in the past several years. As such, it is important to consider as many an(prenominal) likely and reasonable options as possible when evaluating the military units of taxes on capital purchases. With the election of President Regan, the previously more rush notion of Supply-Side Economics has begun to be implemented, offset first with the Economic Recovery Tax spell of 1981, which in addition to other(a) business incentives, accelerated depreciation for capital expenditures to 5 years. This provision was repealed the following year as part of the Tax rectitude and Fiscal Responsibility Act of 1982. We power saw the back & forth over reducing tax rates and providing spending incentives to businesses over again with the failed Tax see the light 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 somewhat the future situation of business tax is uncertain. Because o f 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 moderateness in that area. However, it is more important than ever at this time that we not be to heavily on benefits derived from more favorable tax treatment. As such, it is in our elicit to also determine if a given over project will produce a positive financial result, even in less favorable taxation scenarios. arouse Efficiency ConsiderationsOf the $560,000/year savings Pressco, Inc. has estimated we will enjoy as a result of purchasing their equipment, $360,000 (or 64%) is allocated to send away-efficiency. Therefore, we must closely examine the current climate surround supply efficiency. There are two components to considering the effect of burn economy the possibility of future tax incentives and/or penalties for fuel efficiency in manufacturing, and the expenditure of fuel. The around likely scenario for ta x incentives to increase fuel efficiency will be in the form of credits for purchases, which through purchasing now we will likely not be able to take reinforcement of. Penalties for higher fuel consumption may be levied at a signalize in the not-too-distant future as the federal official organization strives to both more comprehensively address environmental concerns, and regulate the price of fuel. We saw both of these in The null Policy and preservation Act of 1975, and with the road Revenue Act of 1982, which temporarily increase the gasoline excise tax by $0.05 (an increase from $0.04 to $0.09).The Energy Policy and Conservation Act of 1975 established reserves of bad-mannered rock oil and gave the President the authority to range maximum domestic production as well as rationing and preservation 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 p rices. When looking at the chronicle of fuel prices, I see that we are in a period of outstandingly high prices. It is of critical importance that we evaluate the likelihood of prices remaining this high for the life of the equipment in order to consider how some(prenominal) 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 change magnitude 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. virtually recently, OPEC has been unsuccessful in setting production quotas low enough to stabilize prices, and they have again begun to fall. 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. Reducing 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 attractive. 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 cause financial benefits, making this investment one that is based o more than unstained speculation or salesmanship.