Corporate Finance Essay

2753 words - 11 pages

Shanghai Jiao Tong UniversityAntai College of Economics and ManagementCase study: Capital budgetfor Pressco. IncTeam: Jian Feiyi 1091209040Zhang Yangyi 1091209041Shi Yan  1091209053Ge Mengfei 1091209051Tong Xuemin 1091209031March 2010AbstractMs. Rogers, a marketing representative for Pressco, Inc., spares no effort to persuade its potential customers like Paperco to sign a binding contracts of purchasing new mechanical drying equipment. In view of the uncertainty about whether a rumored new tax legislation will come into effect or not, company like Paperco must examine the net present value of the old facility and new purchasing (with ITC earned or not) respectively in order to decide if it's worth investing. In this paper, net present value of new facility under both existing and rumored tax legislation are calculated, as well as the expected cost savings for Paperco. On this basis, we are trying to make some suggestions on the standpoint of Pressco and its counterparts with the help of sensitivity analysis method, and finally our takeaways.Keywords: Cash Flow, Net Present Value, Investment Tax Credit(ITC)Content41.1 Parties related 41.2 Investment tax credit (ITC) 51.3 Rumored tax legislation 52. Financial analysis 62.1 NPV for equipment replacement without tax change 72.2 NPV for equipment replacement under new tax legislation 82.3 NPV for equipment replacement without ITC 93. Dynamic financial analysis 103.1 floating cost saving 123.2 floating price the equipment investment 153.3 Adjusted discount rate 164. Conclusions and suggestions 164.1 Conclusions 174.2 Suggestions for both parties 175. Takeaways Investment backgroundParties relatedPresso. Inc: a company in the line of mechanical drying equipmentPaperco: a potential customer of Pressco. Inc.Jane Rogers: a marketing representative for PresscoIn the year 1984, Jane Rogers used to persuade Paperco's management to purchase this new mechanical drying equipment, but it turned out to be unsuccessful because the customer viewed the proposed investment as moderately attractive but easily postponable at little cost to Paperco.In the year 1985, Jane Rogers decided to persuade Paperco's management again with her well-prepared financial presentation, which was designed to help close the sale of the new equipment. In her presentation, she gave the expected price of the new equipment of $2.9 million, and also pointed out that the cost saving that Paperco would realize from the proposed new equipment amounted to $560,000 per year. Of this amount, $360,000 in saving was expected from more efficient fuel utilization.Investment tax credit (ITC)According to the Internal Revenue Service(IRS), a credit against tax was given to investments in certain depreciable property. The amount of investment tax credit(ITC) is different based on the depreciable life of the property, as well as the date of the property placement.According to the detailed ITC rate instructions, the old equipment in Pressco...

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