Financial Management

Whitman School of Management

Spring 2020
Case Questions

Pressco, Inc.

1. What is the net present value of the mechanical drying equipment investment
opportunity (as of December 1985) assuming a 12% cost of capital for Paperco.
Assume the rumored new tax proposal is not enacted and that the new drying
equipment replaces the old equipment in December 1986.

2. What is the net present value of the investment opportunity assuming that (a)
the new tax proposal is enacted; (b) the new drying equipment replaces the old
in December 1986; and (c) Paperco signs a binding purchase contract soon
enough to be ‘grandfathered’ as to the 8% investment tax credit and the use of
ACRS depreciation?

3. What is the net present value of the investment opportunity assuming that (a)
the new tax proposal is enacted; (b) the new drying equipment replaces the old
in December 1986; and (c) Paperco does not sign a binding purchase contract
soon enough to be ‘grandfathered’ as to the 8% investment tax credit and the use
of ACRS depreciation?