Discussed from Paperco, Inc. Essay Example for Free

Discussed from Paperco, Inc. EssayThis case study is discussed from Paperco, Inc. point of view of whether they should avail the revenue benefits and cost savings in replacing the mechanical drying equipment.RecommendationBased on the analysis below in this memo, Paperco should leverage youthful mechanical drying equipment today in advance in anticipation of the passage of unseasoned appraise decree. Purchasing the equipment now maintains a positive Net Present Value for the detonator count on if the legislation is not enacted, or if the forward-looking legislation is enacted and the capital rove is contracted early fair to middling so that it is grandfathered in. With tax legislation grandfathered, the acoustic projection gets the benefit of the new lower corporate tax rate and the old ACRS derogation method. Although when presented with this project one year ago in 1984, Paperco was able to be postponed this capital project since it was merely moderately attractiv e. The prospect of new tax legislation being enacted as rumored makes the Net Present Value of the project comparatively more positive if the tax law changes are enacted, so Paperco should act now before tax law changes make this project infeasible. cathode-ray oscilloscopeIn November 1985, Jane Rogers a marketing representative of Pressco, Inc. approached Paperco, Inc. to sell its mechanical drying equipment at a price of $2.9 million. This new equipment would replace less efficient facilities that had been placed in service late in December 1979. According to Roger, the total cost saving (exclusive of disparagement charges) from the proposed inst tout ensembleation of new equipment amounted to $560,000 per year. Of this amount, $360,000 in savings was expected to father from more efficient fuel utilization.One year earlier, Rogers had been unsuccessful in interesting Papercos management in purchase of new equipment. Paperco felt that the enthronisation innew equipment as moderat ely attractive at that time. However, beginning 1986, new tax legislation had been rumored to (1) eliminate the investment tax credit for new equipment (2) extend depreciation lives for new equipment, and (3) decrease the corporate tax rate from 46% to 34%.Papercos senior management was concerned that the basic pressure in the firms sales of mechanical drying equipment. Papercos management suddenly expressed significant interest in moving forward with the purchase of new equipment and seemed anxious to sign a fertilisation contract.Discussion and AnalysisWe need to analyze when is the best situation for Paperco, Inc. to replace the old facilities with new drying equipment that allow enable the Company to avail greater tax benefits and cost savings.There are three alternative courses of action available to Paperco, Inc. to decide whether to buy the new drying equipment or not.I. Buy the new equipment yet no legislation is enactedAdvantagesContinue to pulmonary tuberculosis a 5 geezerhood ACRS depreciation model with higher depreciation expense Efficiency in operations due to new equipmentDisadvantagesRetain all tax credits due to using 5 year ACRS depreciation model in equipment with useful life of 7 years Tax rate continued at 46%II. Buy the new equipment when the new tax proposal is enacted and bind the contract soon enough to be grandfathered or before the enactment of the law AdvantagesContinue to use a 5 years ACRS depreciation model with higher depreciation expense Efficiency in operations due to new equipmentInvestment tax credit that will reduce Papercos taxesTax rate reduced to 34% from 46%DisadvantagesDepreciation life of the equipment will not be extendedIII. Buy the new equipment when the new proposed tax is enacted except do not bind the contract in time to be grandfathered or after the enactment of the law AdvantagesEfficiency in operations due to new equipmentTax rate reduced to 34% from 46%Depreciation life of the equipment will be extend ed by 2 yearsDisadvantagesMACRS depreciation model will generate lower depreciation expenses than the ACRS depreciation model No investment tax credit due to binding the contract after the law was enactedOption I in which the rumored tax proposal is not enacted and that the new equipment replaces the old equipment in December 1986. Paperco would retain all tax credits due to the fact the machine has been in service for 84 months, and use a 5-year ACRS depreciation model for the new equipment. This option has a positive NPV of $2,619,745. Option II in which the new tax proposal is enacted. The new equipment is installed in December 1986. Paperco signs a binding contract soon enough to be grandfathered, this allows Paperco to receive the 8% tax credit and use ACRS depreciation. At the same time, their tax rate would fall to 34%. Paperco would benefit from this more approbatory grandfathered tax approach. Option II has a positive NPV of $3,414,104. Option III in which the new tax prop osal is enacted and Paperco installs the new equipment in December 1986, only when they do not sign a binding contract in time to be grandfathered and receive the 8% investment tax credit and use ACRS depreciation. The company will use MACRS and a depreciation period of 7 years. The NPV of the project with this timing and structure is $3,228,044. Without the grandfathered tax allowance, the new tax legislation makes the project unattractive based on lower Net Present Value.CalculationsRe-affirmationThere are three options available to Paperco, Inc. with respect to this capital investment Option I New legislation is passed and Paperco qualifies for grandfathering, Option II New legislation is passed and Paperco does not qualify for grandfathering, Option III Buy the new equipment when the new proposed tax is enacted but do not bind the contract in time to be grandfathered or after the enactment of the lawLast year (1984) investment in new drying equipment pursuant to Option I was no t pursued despite its attractiveness as a viable capital project, perhaps because it was possible that a better alternative might arise. However, given the impending tax legislation, the possible alternatives are now known, and they are not good. Under the new tax legislation without grandfathering, the project is not viable. Paperco should invest in the new equipment (with binding contract) because not doing so soon enough, the project will not a viable alternative, spot investing in the equipment is a viable alternative (i.e., the Net Present Value of the project in Option II is higher than other alternatives).