HW #8: For Thursday, Oct 22nd

TEAM ASSIGNMENT:
1. Read the Pressco, Inc. case accessible at:
https://cb.hbsp.harvard.edu/cbmp/pl/41905559/41905626/1dafb2f0de4baaeb749d65004e8c4c08.
Jane Rogers of Pressco has called upon your consulting team to prepare a financial presentation to
help close her sale of drying equipment to Paperco, Inc. She has learned that Papercos nominal
after-tax MARR is 15% p.a., not 12% as reported on page 2 of the case. She also knows that
Papercos management believes that fuel costs will remain unchanged through 1990 and then rise
at 6% p.a. thereafter, while all other, non-fuel costs are expected to rise at 6% p.a. throughout the
study period. Jane wants you to address the following possibilities:

Rumored tax proposals are not enacted and the new drying equipment is placed in service in
Dec 1986.
Rumored tax proposals are enacted, the new drying equipment is placed in service in Dec
1986, and Paperco signs a purchase contract soon enough to be grandfathered for the 8%
investment tax credit and the use of ACRS depreciation.
Rumored tax proposals are enacted, the new drying equipment is placed in service in Dec
1986, and Paperco does not sign a purchase contract soon enough to be grandfathered for the
8% investment tax credit and the use of ACRS depreciation.

When conducting your analysis, pay particular attention to the Pressco Case Considerations &
Assumptions provided at the end of this assignment.
2. All teams are to submit a concise written report presenting this analysis for Jane Rogers. This
report is to be in essay format on 8.5 x 11 inch paper. Avoid excessive re-hashing of the case.
Your teams written report must be a stand-alone document and must show all work to support
your analysis and conclusions. Graders must be able to see clearly how answers were derived. If
needed to support your analysis, copies of pertinent Excel spreadsheet elements (if any) should be
incorporated into the body of your written report. Credit will not be given for unsupported
answers. A reader of your report should not need to refer to your separate Excel file to see how the
answers in your report were derived. Each team must submit its report in PDF format via the
Canvas website prior to the beginning of class. Late submittals will not be accepted.
All work is to be that of your team only, consistent with the University Honor Councils Guide to
Academic Integrity. All contributing members of your team must acknowledge and sign the
required Pressco Report Cover Page for this case posted in Canvas Files. The signed cover page
must be scanned and inserted at the front of your teams report prior to submitting the report on
Canvas.
3. After completing your case analysis, each team is also required to submit its spreadsheet
workbook, in Excel file format, electronically on Canvas prior to the beginning of class. Your
workbook should show your year-by-year analysis of each of the above three Pressco scenarios.
Format the spreadsheets such that each row represents a year and each column represents a cash
flow item. NOTE: Each team must upload only one Excel file. If your analysis was done in
multiple workbooks, compile them into a single workbook file before uploading. Any one team
member may submit the file, but submit only one file per team. Submit this Excel file via the
Pressco Excel Workbook page under Case Study Excel Files in Canvas Assignments.
(Continued)

4. TEAM PRESENTATIONS. The following teams will give a verbal presentation of their analysis
of this case:
Asselin/Besser/Ni/Shu/Taverna
A.Cai/Cam/Do/Fan/Hua
Presentations must not exceed 10 minutes in length and must involve at all team members. Use
PowerPoint slides to supplement your presentation. Assume your audience is comprised of
Paperco executives, i.e., Presscos potential customer. PowerPoint files must be emailed to Dr.
Cassel no later than 9AM on the date of the class (tcassel@seas.upenn.edu). No changes may be
made to your PowerPoint files after this deadline. Be sure to follow the Presentations guidelines
as discussed in class and posted in the Classroom Slides folder in Canvas Files. Presentations
will be graded on their professionalism, effectiveness and accuracy. There will be a question &
answer time after each presentation in which the audience is encouraged to participate.

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PRESSCO CASE CONSIDERATIONS & ASSUMPTIONS

For each of the three scenarios, analyze the incremental after-tax cash flow of replacing the old
equipment with the new equipment. The decision is being made in 1985 which, therefore, should
be the base year for any PW analyses.
The analyses should be performed in actual inflated dollars to be consistent with the
depreciation values which are in actual dollars.
An investment tax credit (ITC) reduces the tax liability dollar-for-dollar at the time the property
is placed in service (1986). ITC is a one-time reduction in taxes and not a reduction in taxable
income (as is depreciation); i.e., if you have a $1000 tax liability and a $100 ITC, your net tax
payment would be $900.
Your basis for depreciation must be reduced by the amount of any investment tax credit
claimed. The exhibits in the case which provide depreciation values do not take this into
account. The values in the exhibits will have to be reduced accordingly in scenarios where ITC
is claimed.
The case states that the new equipment would be placed in service in Dec 1986, hence
depreciation would commence in 1986 which is consistent with the dates shown in Exhibits 3 and
5 and is consistent with the tax regulations as we discussed in class. Accordingly, ITC would be
claimed in 1986 when the equipment is placed in service.
We can also assume that revenues (savings) begin to accrue in Dec 1986. However, using endof-year revenue recognition, it would be reasonable to record the 1st year revenues (savings) as
1987 cash flows. This leads to a one-year offset between the first year of depreciation (1986)
and the first year of revenue recognition (1987).
The annual savings Jane Rogers believes Paperco would realize from the new equipment
(pursuant to paragraph 1 of the case) should be assumed to be in 1985 base-year dollars, i.e., at
the time of the case.