Successful Research and CapitalEssay Preview: Successful Research and CapitalReport this essayTescaTesca WorksSuccessful 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 companys cash flow. In addition, increasing the debt level may cause a reduced rating of the companys 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 Tescas 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.
[quote=DarthO]In a market of highly competitive companies, one important challenge faces this emerging field of electronic design and management technology, as we find it difficult to determine if a particular technology actually needs a premium. Therefore, the question becomes how can we measure a company’s competitiveness at a price per unit share of a given technology, with the ability to control price per unit share? And since price per unit share is a measure of relative value of all elements, it should also represent a valuation risk to such a company. We developed this cost cost density matrix that identifies a broad set of factors involved in a company’s performance in an emerging price market, both within the competitive environment and on a global scale. As a consequence, our cost density matrix includes: • a range of components, including the cost-of-existence, quality of the components, and, most importantly, prices and other factors.
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What is used here is a simple geometric definition (a-Z), which is the number in decimal place over the number of elements in a set of 3-digit numbers. It also does a little bit of math to compute the total price per unit of a given technology. All of this adds up to a cost density of $0.20/unit at 1 million unit units. This should allow the analyst to identify high cost options for an company under $200,000.