Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Pressco, Inc. (1985) In November 1985, Jane Rogers, a marketing representative for Pressco, Inc., was preparing a fmancial presentation designed to help close the sale
Pressco, Inc. (1985) In November 1985, Jane Rogers, a marketing representative for Pressco, Inc., was preparing a fmancial presentation designed to help close the sale of mechanical drying equipment to Paperco, Inc. The equipment, which she hoped to sell to Paperco at a price of $2.9 million, would replace less efcient facilities that had been placed in service late in December 1979 by Paperco. The cost savings (exclusive ofdepreciation charges) that Rogers felt certain Paperco would realize from the proposed new equipment installation amounted to $560,000 per year. Ofthis amount, $360,000 in savings was expected to come from more efficient fuel utilization. One year earlier, Rogers had been unsuccessful in interesting Paperco's management in this cost reduction opportunity. The customer viewed the proposed investment as moderately attractive but easily postponable at little cost to Paperco. They were originally unwilling to commit to the purchase for this reason. But since Rogers's earlier presentation, new tax legislation had been rumored that would (1) eliminate the investment tax credit for new equipment,1 (2) extend depreciation lives for new equipment, and (3) reduce the corporate tax rate from 46% to 34% beginning in 1986. While the prospects for passage of the rumored tax legislation were uncertain, Pressco's senior management was concerned that the basic thrust of the legislation might hurt the rm's sales of mechanical drying equipment. Rogers found this concern somewhat curious since she had experienced an unprecedented surge in customer inquiries after the announcement of the new tax initiative. Indeed, Paperco's management suddenly expressed significant interest in moving forward with the purchase of the mechanical drying equipment and seemed anxious to sign a binding contract. In preparing the economic analysis to support her sales presentation to Paperco, Rogers recalled that Paperco had used double-declining-balance depreciation for assets acquired before 11' 1f 81 and was using ACRS depreciation for assets acquired on or after that date (Exhibit 2). To be consistent with these assumptions, Rogers prepared the relevant depreciation schedules for the old and new equipment as indicated in Exhibits 3 and 4. In the event that new tax legislation were passed prior to the signing of a binding sales contract with Paperco, Rogers also prepared a depreciation schedule using the terms of the rumored 1Exhibit 1 presents a chronology of changes in the tax law regarding investment tax credits from 1975 to 1985, as well as the change rumored but not yet shaded for 1986
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started