Discussed from Paperco, Inc. Essay

This case study is discussed from Paperco, Inc. point of run into of whether they should avail the revenue revenue benefits and equal savings in replacing the mechanized drying equipment.RecommendationBased on the analysis below in this memo, Paperco should bribe bracing mechanically skillful drying equipment now in advance in foresight of the passage of naked as a jaybird taxation order. Purchasing the equipment now maintains a imperative Net Present Value for the outstanding assure if the lawmaking is not enacted, or if the recent legislation is enacted and the capital bug out is rationalizeed untimely overflowing so that it is grandfathered in. With tax legislation grandfathered, the wander gets the benefit of the immature lower corpo tread tax rate and the old ACRS dispraise 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 attractive. The prospect of late tax legislation being enacted as ru mored makes the Net Present Value of the project comparatively more dogmatic if the tax practice of righteousness changes are enacted, so Paperco should act now before tax law changes make this project infeasible.BackgroundIn 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 sweet equipment would replace less businesslike facilities that had been placed in service late in December 1979. consort to Roger, the total cost saving (exclusive of dispraise charges) from the proposed installation of clean equipment amounted to $560,000 per year. Of this amount, $360,000 in savings was expected to come from more efficient fuel utilization. peerless year earlier, Rogers had been unsuccessful in interesting Papercos management in barter for of new equipment. Paperco felt that the enthronization innew equipment as moderately a ttractive at that time. However, beginning 1986, new tax legislation had been rumored to (1) eliminate the enthronement tax credit for new equipment (2) extend wear and tear lives for new equipment, and (3) overthrow the corporate tax rate from 46% to 34%.Papercos senior management was concerned that the basic thrust in the firms sales of mechanical drying equipment. Papercos management all at once expressed significant interest in moving forward with the purchase of new equipment and seemed anxious to sign a restricting contract.Discussion and outlineWe need to analyze when is the best situation for Paperco, Inc. to replace the old facilities with new drying equipment that go out enable the Company to avail greater tax benefits and cost savings.There are three alternative courses of action operable to Paperco, Inc. to try whether to buy the new drying equipment or not.I. Buy the new equipment yet no legislation is enactedAdvantagesContinue to wasting disease a 5 years ACR S depreciation model with higher depreciation expense Efficiency in operations collectable to new equipmentDisadvantagesRetain all tax credit due to using 5 year ACRS depreciation model in equipment with effectual 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 principle 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%Disadvantages derogation life of the equipment will not be extendedIII. 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 law AdvantagesEfficiency in operations due to new equipmentTax rate reduced to 34% from 46%Depreciation life of the equipment will be extended by 2 yearsDisadvantagesMACRS depreciation model will generate lower depreciation expenses than the ACRS depreciation model No investment tax credit due to adhere the contract after the law was enacted picking 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. cream 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 favorable grandfathered tax approach. excerption II has a positive NPV of $3,414,104. Option III in which the new tax propos al is enacted and Paperco installs the new equipment in December 1986, but 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 not pursued in spite of its attractiveness as a possible capital project, perhaps because it was come-at-able 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, while 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).