Tescco Essay

2762 words - 11 pages

TESCA CASE STUDY 71) How much importance should be given to the energy cost situation ?The question of energy cost being a factor of the decision to move forward with this project is of critical importance. This is because whether or not consumers are inspired to purchase a new appliance may be spurred by increases in energy costs as well as possible tax benefits or rebates from power generating companies. Some consumers may be aware of the benefits of energy efficient appliances which may cause an increase in the normal demand for refrigerators. Tesca is in a unique position to be able to offer high efficiency refrigerators to the United States public at a time when the public is looking to reduce their use of electricity and other utility costs. When we look at the graph above it can be seen that the cost of electricity has steadily increased over the last 10 years. The price per kilowatt hour has increased almost 50% in 10 years (EIA, 2014). Thus to the consumer the price of energy is a big concern and the costs will most likely continue into the future. There is potential for an increased demand to replace aging inefficient appliances that are causing increased electrical bills for consumers. The energy cost and potential benefits to the consumer are of importance when determining the future of this project. The project is forecast to be of a positive value if the demand for refrigerators is at an average or strong demand from consumers. However, the realization of a high or average demand is mainly based on 'gut-feeling' rather than on sound financial information. There are too many variables in the marketplace that could cause demand to be weaker than projected. Such variables as a weak economy or recession could cause sales to drop which in turn would cause the project to lose its value quickly.2) What is the project's cost of equity? What is the appropriate discount factor to use for evaluating the refrigerator project?As seen in Exhibit I below, the project's cost of equity (COE) is calculated to be 13.487%. We found this value by using the Capital Asset Pricing Model (CAPM) formula by adding the treasury note yield with the beta value, then taking the market return rate and subtracting the treasury note yield. We then multiply those values together to attain the cost of equity value of 13.487%. This means there is a rate of return on investment of 13.487%.The Beta for Tesca Works, Inc. is fairly consistent with their competition. Tesca's beta value is at 1.3 which means that Tesca's value has been more volatile than the market. While this means there is more risk when investing in Tesca there is also a greater possibility for higher rates of return.Exhibit I also shows the table used to calculate the Weighted Average Cost of Capital (WACC) or discount factor which we used to evaluate this particular project. We used the following formula to calculate the WACC for this project. We know that the higher the weighted average cost of capital...

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