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Exhibit 1 Sales forecasts: The forecasts are based on projected levels of demand

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Question;Exhibit 1 Sales forecasts:The forecasts are based on projected levels of demand. The firm could face weak, average, and strong demand. All the numbers are expressed in today?s dollars. The forecasted average inflation per year is 3.0%.Demand level Weak Average StrongProbability 25% 45% 30%Price per refrigerator $1,375 $1,575 $1,600Units sold per year 40,000 42,500 43,000Labor cost per refrigerator $250Parts $300Selling General & Administrative $10,000,000Average warranty cost per year per refrigerator for the first five years is $75. The present value of this cost will be used as a cost figure for each refrigerator. Afterwards, the refrigerator owners will become responsible the repairs.The refrigerators can be produced for eight years. Afterwards, the designs become obsolete.Exhibit 2 Compressor costs:Compressor choices:Compressor model number CM - 004 TS - L12Price per compressor and installation $280 $260Average annual warranty cost per year for five years.Afterwards, the refrigerator owner will become responsible the repairs*. $40 $50The chosen compressor will be installed in every refrigerator and will become a cost figure for each unit produced.* The compressor manufacturers are not providing Tesca Works with any warranty. However, Tesca Works will provide warranty to its customers. After the initial five years, the refrigerator owners may purchase extended warranty from any insurance company that offers such packages.Exhibit 3 Investment needs:To implement the project, the firm has to invest funds as shown in the following table:Year 0 Year 1$14 million Production and selling of commercial appliances startsMACRS depreciation will be used.To facilitate the operation of manufacturing the refrigerators, the company will have to allocate funds to net working capital (NWC) equivalent to 10% of annual sales. The investment in NWC will be recovered at the end of the project.Exhibit 4 FinancingThe following assumptions are used to determine the cost of capital. Historically, the company tried to maintain a debt to equity ratio equal to 0.50. 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 firm?s cash flow. In addition, increasing the debt level may cause a reduced rating of the company?s bonds. The marginal tax rate is 35%. All the numbers are expressed in today?s dollars. The forecasted average inflation per year is 3.0%.Cost of debt:The company?s bond rating is roughly at the high end of the A range. Surveying the debt market yielded the following information about the cost of debt for different rating levels:Bond rating AA A BBBInterest cost range 4.5% ~ 5.5% 5.25% ~ 6.5% 6.5% ~ 9%The company?s current bonds have a rating of A.Cost of equity:The current 10-year Treasury notes have a yield to maturity of 3% and the forecast for the S&P 500 market premium is 6.5%. The company?s overall? is 1.3.? analysis:Company Tesca Works, Electrics Plus, General Generators, Universal Power, Generators Inc., International GeneratorsTW EP GG UP GI IGOver all? 1.3 1.4 1.3 1.6 1.2 1.35 debt to equity 0.5 0.3 0.5 0.45 0.35 0.25Percentage of income from generators 50 45 90 95 85 851)Use the average demand scenario to evaluate the sensitivity of the project?s NPV with respect to sale price of the refrigerator and the cost of the compressor.2)Based on the scenario and sensitivity analysis you performed above, comment on the overall riskiness of the project.

 

Paper#52038 | Written in 18-Jul-2015

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