Successful Research and Capital

Tesca

Tesca Works

Successful research and capital are required to develop new products. A detailed analysis of the proposed refrigerator project will be thoroughly discussed in the following financial plan for the development and production of the refrigerator. You will find useful information for the cost of production, financing, warranty costs, and cost of capital.

To begin, great consideration should be given to energy costs because it affects buyer power. Companies are subject to extensive state and federal environmental regulations that may involve significant and increasing costs and may adversely affect the company. These regulations may increase the required amount of energy that must be procured from renewable resources. Companies are faced with investing billions of dollars in emissions reduction programs and processing technologies. Higher energy prices can become a drag on the overall economy. When the economy can no longer absorb the energy price rise, higher energy prices begin to affect the prices of other goods and services; thus would be the case for refrigeration.

Furthermore, the more energy that is consumed, the greater the risk that energy price increases and supply shortages will affect your profitability. Energy management is the key to saving energy. Much of the importance of energy saving stems from the global need to save energy. This global need affects energy prices, emissions targets, and legislation, all of which lead to several compelling reasons why you should save energy at your organization specifically. With the introduction of a new, energy star refrigerator, consumers will be provided the opportunity of becoming environmentally friendly while benefiting from rebates and services that are offered by utility companies. These benefits are likely to increase consumer interest in your product.

The following assumptions were used to determine the cost of capital. Historically, the company tried to maintain a debt to equity ratio equal to 0.40. This ratio was used because lowering the debt implies giving up the debt tax shield and increasing it makes debt service a burden on the company's cash flow. In addition, increasing the debt level may cause a reduced rating of the company's bonds. The marginal tax rate is 40%. The forecasted average inflation is 3.5% per year. Analysis has determined that the cost of equity for Tesca's refrigerator business including inflation of 3.5% is 17.95% and the discount factor is 13.94% (See Tesca Works Inc. Spreadsheet-Cost of Capital).

Cost of equity | |

Risk Free Rate (Treasury notes) | 6.00% |

S&P 500 Market Premium | 6.50% |

Company Beta | 1.3 |

Cost on Equity (expected return) | 17.95% |

Discount Factor |

Debt to Equity Ratio | 0.4 | |

Marginal Tax Rate | 40% | |

Bond Rating | A | |

Chosen Bond Cost | 6.50% | assumed at high end of A rating |

Cost of equity | 17.95% | |

WACC (DE ratio held constant) | 13.94% | discount factor |

A thorough comparison between the two compressors was utilized to determine that the TS-L12 compressor should be used in the production of the refrigerator if the company chooses to go ahead with the project. Although the CM-004 has lower overall total cost, further analysis will show that the TS-L12 will provide better bottom line totals, NPV and IRR.

Comparison of CM-004 and TS-L12 Compressors |

Interest rate | 13.94% |

Model | CM-004 | TS-L12 |

Price per compressor | $280.00 | $260.00 |

Average annual warranty cost | $40.00 | $50.00 |

Present value of warranty cost | $146.23 | $182.79 |

Total cost of compressor | $426.23 | $442.79 |

Capital budgeting techniques such as forecasting cash flows, net present