Pressco Case Study
In reviewing the proposal presented by Pressco, Inc. to provide new mechanical drying equipment at a cost of $2.9 million I have considered the cash flow implications of the purchase in terms of present value of the investment and estimated resulting savings, as well as possible alternatives to purchase, and the current political climate as it affects the business issues of taxation and energy policy.
Following this review, it is my recommendation that we enter into a contract for the purchase of the equipment in question before the end of the year for the following reasons. Currently, our tax rate is not particularly favorable. We have experienced some small reductions in the late 1970’s, however the introduction of Supply-Side economics into mainstream policy indicates more favorable rates as rumored are on the horizon, making this a better time to spend money and reduce our taxable income. The projected cost savings will not begin until we are likely to be benefitting from a more favorable tax rate, letting us make more money 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 detail on the options and my rationale below.
Assessment of Investment Cash Flows:
Assuming 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 remaining as they are or changing and the loss or continuation of the Investment Tax 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 repeal for the ITC tax credit, as well as the possibility of “Grandfathering” the last two options. Additional detail on these calculations and the possible permutations considered is available in Appendix A.
To summarize my findings,
Following this review, it is my recommendation that we enter into a contract for the purchase of the equipment in question before the end of the year for the following reasons. Currently, our tax rate is not particularly favorable. We have experienced some small reductions in the late 1970’s, however the introduction of Supply-Side economics into mainstream policy indicates more favorable rates as rumored are on the horizon, making this a better time to spend money and reduce our taxable income. The projected cost savings will not begin until we are likely to be benefitting from a more favorable tax rate, letting us make more money 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 detail on the options and my rationale below.
Assessment of Investment Cash Flows:
Assuming 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 remaining as they are or changing and the loss or continuation of the Investment Tax 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 repeal for the ITC tax credit, as well as the possibility of “Grandfathering” the last two options. Additional detail on these calculations and the possible permutations considered is available in Appendix A.
To summarize my findings,