Automatic Screw Machine Products, located in Decatur, Alabama, is a manufacturer of precision-turned and milled parts and specialty fasteners. The diverse capabilities of Automatic SMP enable machining of a wide variety of material grades such as heat resistant super alloys, aluminum, brass, steel, and stainless steel. Seeking to expand from a small machine operation, Automatic SMP planned to purchase a large Mazak VTCC vertical machining center to enable broader capabilities and numerous applications.
However, in November new tax legislation had been rumored that gained the interest of Paperco to buy new equipments. This gave Jane Rogers the opportunity to persuade again the company to purchase their product.
Point of View Paperco — to avail all the possible tax benefits and cost savings in replacing the drying equipment of the company. November New tax law was rumoured to be enacted that gained the interest of Paperco to pursue the contract with Pressco Inc.
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 cost savings? Statement of Objectives This case study aims to foster discussion and educate students about capital investment.
To have a better understanding on capital budgeting. To know the importance of government regulations regarding depreciation methods and tax implications in capital investment. To prepare students in dealing with investment projects of a business.
Alternative Courses of Action 1.
Buy the new machine yet no new legislation is enacted. The company will continue to use a 5 year ACRS depreciation model with higher depreciation expense. Efficiency in operation due to new equipments. The company will retain all tax credits due to using 5 yr. ACRS depreciation model in equipments with 7 yr useful life.
Buy the new machine when the new tax proposal is enacted and bind the contract soon enough to be grandfathered or before the enactment of the law. Depreciation life of the equipment will not be extended. Buy the new machine when the new tax proposal is enacted but do not bind the contract in time to be grandfathered or after the enactment of the law.
Advantages Efficiency in operation due to new equipments. Depreciation life of the equipment will be extended by 2 years. The company will not be able to receive the investment tax credit due to binding the contract after the law was enacted.
Recommendation Based from the alternative courses of action presented, it is being recommended to do the second option for it provides lower tax implications thus greater cost savings. Bind the contract with in a timely manner that will Top Management 1 month Pressco.
Appropriation of funds for the The company will set aside funds Finance Department investment. Top Management 5 months Related posts:Case study: Paychex, Inc. Paychex optimizes the customer experience Paychex, Inc.
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