Financial Decision Making - Spring 2016

Manuel A. Callizo Pecci
Case Study - Pressco, Inc. (1985)
Pressco Equipment Purchase

History & Research
- Pressco, Inc. is a company in the line of mechanical drying equipment.
- Paperco is a potential customer of Pressco, Inc. for the purchase of equipment.
- Jane Rogers is a marketing representative for Pressco.
In 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 a little cost to Paperco. In November 1985 a new tax legislation had been rumored that gained the interest of Paperco to buy the new equipments. This situation gave Jane Rogers the opportunity 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 calculation.

Statement of the problem
When is the best situation to replace the old drying equipments of Paperco that will enable the company to avail greater tax benefits and costs savings?, Ms. Rogers, spares to persuade its potential customers like Paperco to sign a binding contract of purchasing new mechanical drying equipment. In view of the uncertainty about whether a a rumored new tax legislation will come into effect or not, companies like Paperco must eliminate

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.

Analysis
NPV
The NPV analysis has been conducted for each scenario, based on a 12% cost of capital.