Pressco Inc
I: Statement of Financial Problem:
In November 1985 Paperco was presented with the critical business decision of replacing its existing mechanical drying equipment that had been originally placed into service in 1979 with more efficient equipment provided by Pressco, Inc. The consequences of this decision would have far reaching consequences as replacing the equipment could result in cost savings up to $560,000 annually. However, there were other critical factors to address before moving forward with the project.
One of the most important factors to consider was the rumored new tax legislation that would, “(1) eliminate the investment tax credit for new equipment; (2) extend depreciation lives for new equipment; and (3) reduce the corporate tax rate from 46% to 34% beginning in 1986. (Harvard, 1991)”
Therefore, the financial problem facing Paperco is what is the Net Present Value (NPV) of replacing its existing mechanical drying equipment with the more efficient equipment from Pressco, assuming (1) the rumored tax legislation is enacted; (2) Paperco fails to sign the contract in time to receive the investment tax credit; and (3) the equipment is installed in December 1986.
II: General Framework for Financial Analysis:
“Net Present Value (NPV) is a method of ranking investment proposals using the NPV, which is equal to the present value of the project’s free cash flows discounted at the cost of capital. (Brigham, 2009)” Simply stated the NPV of a proposed project allows organizations to determine whether or not the project is worth pursuing. It shows how much the project will contribute to shareholder wealth (Brigham, 2009). NPV is the best financial measurement tool organizations can employ in determining the potential value a project may add to the organization. Generally speaking, the higher the NPV, the more desirable the project. Conversely, a lower NPV or negative NPV should be viewed as a warning sign and the project should be rejected.
The most
In November 1985 Paperco was presented with the critical business decision of replacing its existing mechanical drying equipment that had been originally placed into service in 1979 with more efficient equipment provided by Pressco, Inc. The consequences of this decision would have far reaching consequences as replacing the equipment could result in cost savings up to $560,000 annually. However, there were other critical factors to address before moving forward with the project.
One of the most important factors to consider was the rumored new tax legislation that would, “(1) eliminate the investment tax credit for new equipment; (2) extend depreciation lives for new equipment; and (3) reduce the corporate tax rate from 46% to 34% beginning in 1986. (Harvard, 1991)”
Therefore, the financial problem facing Paperco is what is the Net Present Value (NPV) of replacing its existing mechanical drying equipment with the more efficient equipment from Pressco, assuming (1) the rumored tax legislation is enacted; (2) Paperco fails to sign the contract in time to receive the investment tax credit; and (3) the equipment is installed in December 1986.
II: General Framework for Financial Analysis:
“Net Present Value (NPV) is a method of ranking investment proposals using the NPV, which is equal to the present value of the project’s free cash flows discounted at the cost of capital. (Brigham, 2009)” Simply stated the NPV of a proposed project allows organizations to determine whether or not the project is worth pursuing. It shows how much the project will contribute to shareholder wealth (Brigham, 2009). NPV is the best financial measurement tool organizations can employ in determining the potential value a project may add to the organization. Generally speaking, the higher the NPV, the more desirable the project. Conversely, a lower NPV or negative NPV should be viewed as a warning sign and the project should be rejected.
The most