Net Present Value and Project
UNIVERSITY OF LA VERNE
La Verne, California
Tesca Case
A Paper Submitted in Partial Fulfillment of the Requirements for
BUS 635 CRN 1105 – Managing Financial Resources
Nepal Plummer
College of Business and Public Management
Department of Management and Leadership
March 3, 2014
TESCA CASE STUDY
SUMMARY RESULTS AND RECOMMENDATIONS The proposed refrigerator manufacturing and sales project for Tesca Works, Inc. is a financially complicated project which on the surface, given the increase in energy costs and customer demand may seem like a winning proposition. However, when we delve further into the details of the financial projections along with projections of the future of the refrigerator market we are able to make a confident recommendation to Mr. Burton and the executive staff at Tesca Works, Inc. Using the information provided by the Tesca team we were able to create a comprehensive capital budget and cash flow analysis for the proposed refrigerator project. Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive Net Present Value of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values. This information seemed to be very promising for the project in general. However, our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be extremely
La Verne, California
Tesca Case
A Paper Submitted in Partial Fulfillment of the Requirements for
BUS 635 CRN 1105 – Managing Financial Resources
Nepal Plummer
College of Business and Public Management
Department of Management and Leadership
March 3, 2014
TESCA CASE STUDY
SUMMARY RESULTS AND RECOMMENDATIONS The proposed refrigerator manufacturing and sales project for Tesca Works, Inc. is a financially complicated project which on the surface, given the increase in energy costs and customer demand may seem like a winning proposition. However, when we delve further into the details of the financial projections along with projections of the future of the refrigerator market we are able to make a confident recommendation to Mr. Burton and the executive staff at Tesca Works, Inc. Using the information provided by the Tesca team we were able to create a comprehensive capital budget and cash flow analysis for the proposed refrigerator project. Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive Net Present Value of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values. This information seemed to be very promising for the project in general. However, our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be extremely
References: Brigham, E. F., Ehrhardt, M. C., (2014), Financial Management Theory and Practice, Mason, OH: South-Western. EIA, U.S. Residential Electricity Price Graph, Retrieved February 26, 2014, from http://www.eia.gov/electricity/