Pressco Inc

Statement of the Problem

In November 1985, Jane Rogers a representative from Pressco was attempting for the second time to sell Paperco a new piece of drying equipment for their company. Ms. Rogers had already tried to sell this product to Paperco a year prior, but was unsuccessful in her efforts. Since her last visit it has been rumored that there will be new tax legislation that could potentially affect this purchase based on the timing of this acquisition. Paperco's senior management is concerned about this new legislation because they believe the “basic thrust” of it might influence the sale of the mechanical drying equipment. Because of this new legislation, Paperco is now more interested than ever in this purchase due to this proposed tax legislation, but the problem arising is if this new tax legislation is only a rumor and the benefits will not take hold.

There are multiple different scenarios with the new tax legislation being passed or not. First of all there are three parts to this tax law; the first is the elimination of the investment tax credit for new equipment purchased, second the depreciable life of new equipment would be extended, and third the corporate tax rate would be reduced from 46% to 34% beginning in 1986. If Paperco were able to sign a contract with Pressco before the tax law is signed it is said that congress will usually “grandfather” companies into more favorable depreciation and investment tax credits as long the contract was signed prior to the law. It is now Ms. Rogers’s job to break down and explain all the different options to better explain to Paperco's senior management the potential savings and losses on each of the scenarios.

Relevant Facts and Assumptions

Paperco, Inc has been faced with the dilemma of whether to purchase a mechanical drying unit from Pressco, Inc for some time now, but recent proposed tax regulations that would produce depreciation benefits with an investment tax credit could...