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Tesca Works Introduction Michael Burton has recently been hired as the CEO of Tesca Works, Inc. Previously he had been the marketing manager for a...

1. How much importance should be given to the energy cost situation?
2. What is the project’s cost of equity? 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. Forecast the project’s cash flows for the next 20 years. What assumptions did you use?
5. Use the appropriate capital budgeting techniques to evaluate the project.
6. Use the average demand scenario to evaluate the sensitivity of the projects NPV with respect to sale price of the refrigerator and the cost of the compressor.
7. Based on the scenario and sensitivity analysis you performed above, comment on the overall riskiness of the project.
8. Would you recommend that Tesca Works accept or reject the project? What is the basis for your recommendation?

Tesca Works 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. Tesca Works Inc. is a California-based generator manufacturing company. 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.
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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 2
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