What is the project hurdle rate

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Tesca Works Case Study

Introduction

Michael Burton has recently been hired as the CEO of Tesca Works, Inc. Previously he had been the marketing manager for a large manufacturing company and had established a reputation for identifying new consumer trends.  Tesca Works Inc. is a California-based generator manufacturing company.  The company is well known for manufacturing large, heavy-duty generators at a reasonable cost.  One of its greatest achievements is that its generators can be easily modified or customized for different applications.  Also, Tesca Works currently builds commercial appliances.

The company is considering an expansion of its current product line to include refrigerator and maybe, sometime in the future, consumer appliances. Mr. Burton feels that due to high energy prices, consumers will be more willing to consider purchasing new efficient appliances.

The company is well known for its innovation and ability to produce high quality products at a reasonable cost.  One of its greatest achievements is that its manufacturing processes are adaptable to other durable goods.  Also, Tesca Works currently builds commercial appliances.

Profile of Tesca Works

Tesca Works, Inc. was established by the Smith brothers in 1880 as the Logging Saw Company.  The firm started manufacturing large steam saws to serve the logging industry which processed lumber. Their customers were construction companies that provided housing for the population increase in California.  The Smith brothers quickly realized that the times were changing. They started looking for the technologies that would keep them at the forefront of their field of business.

In 1915, the Smith brothers decided that they needed to make generators as replacements for the saws.  They realized that the logging industry was not viable anymore and that generators were starting to serve the same purpose.

The company started making generators in the early 1940's.  Tesca Works then opted to produce commercial appliances.  It was an easy decision to make since the commercial appliances would use common parts with the company's generators and the customers were local hospitals, schools, and governments.  Starting in the 1950's the commercial appliances business accounted for about 50% of Tesca Works' revenues.

The refrigerator

Mr. Burton arranged a meeting with the firm's top management and the chief design and the chief manufacturing engineers to propose a new product.  Mr. Burton presented an argument that more individuals in the United State and Canada would be willing to purchase newer appliances because people are becoming more environmentally conscious.  The new appliances are more efficient and environmentally friendly.  Also, the recent increase in electricity costs seems to be long lasting. This is an opportunity to get people hooked on environmentally friendly appliances as he put it.

The proposal under consideration is for the introduction of a new, energy star refrigerator.  To distinguish Tesca Works from other manufacturers, the proposal included details about the convenience, large shelves in the doors, high volume water and ice dispensers, efficiency, and quietness of operation that need to be developed.

Mr. Phillips and Mr. Lopez, the two engineers, enthusiastically and quickly pointed out that the needed technology could be based on the company's generators. The framework currently used for building the generators can be modified to work for appliances at a low cost.  The marketing vice president, Mr. Chen, pointed out that the marketing analysis could be done quickly and at a reasonable cost. At this point, Mr. Burton charged the participants in the meeting to produce a financial plan for the development and production of the refrigerator.

Consumer Appliances

Most people purchase appliances and keep them for a very long time or until they stop working.  Some get them when they purchase a home and do not think about them.

Recently, most power companies started educating people about the efficiency of new appliances and began offering rebates on the most efficient consumer models. These approaches increased public interest. This renewed the public's interest in low power- consuming appliances.

The decision

Three weeks later, the vice presidents presented the sales and cost forecasts shown in the exhibits.  The information presented contains the cost of production, financing information, and warranty cost estimates.  In addition, there were two options for the compressor in the refrigerators.  The CM - 004 is more expensive to install, but has a lower warranty cost.  The TS - L12 is cheaper to install, but has a higher warranty cost. Which compressor should be used?

The analysis

Mr. Burton noticed that there is an abundance of enthusiasm about entering the refrigerator building business, but his cautious nature made him seek a more neutral analyst.  You have been hired by Tesca Works to analyze the proposal and the capital budget analysis completed by the Tesca Finance staff. 

Assignment:

Prepare a memorandum to Mr. Burton on your analysis (based on the questions below) to build the refrigerator and provide recommendations to Mr. Burton.  The issues that need to be addressed in memorandum report are the following:

1) How much importance should be given to the energy cost situation?

2) What is the project's hurdle rate? What is the appropriate discount factor to use for evaluating the refrigerator project?

3) Which of the two compressors should be used in the refrigerator if you decide to go ahead with the project and why?

4) Based on the scenario and sensitivity analysis, comment on the overall riskiness of the project.

5) Perform a SWOT analysis of the project.

6) Would you recommend that Tesca Works accept or reject the project?  What is the basis for your recommendation?

Attachment:- Assignment.rar

Reference no: EM131417180

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len1417180

3/7/2017 2:14:46 AM

Please remove Question #1 and do from Questions 2 through 6 only. Prepare a memorandum to Mr. Burton on your analysis (based on the questions below) to build the refrigerator and provide recommendations to Mr. Burton.

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