Tesca Case Essay

2333 Words Sep 27th, 2012 10 Pages
1) How much importance should be given to the energy cost situation? Michael Burton’s proposal to expand into new energy efficient products is justified by increasing interest in the public and private sectors to reduce energy costs. At the highest level of government, the Obama administration has tied the US economy’s energy policy with its future success and competitiveness with other global powers. In a speech on June 2009, President Obama specifically mentions the Energy Department’s plans to implement “…aggressive efficiency standards for common household appliances – like refrigerators and ovens – which will spark innovation, save consumers money, and reduce energy demand.”1 Sarah Max from Money magazine (2010) also mentions that …show more content…
• Under the Weak scenario, Tesca can expect cash flows of $190K annually starting in Year 3, and then achieving $5.06M when NWC is recovered in Year 22. • Under the Average scenario, Tesca can expect cash flows of $1.45M annually starting in Year 3, and then achieving $6.37M when NWC is recovered in Year 22. • Under the Strong scenario, Tesca can expect cash flows of $2.5M annually starting in Year 3, and then achieving $7.46M when NWC is recovered in Year 22.
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Ehrhardt, M.C. & Brigham, E.F. (2011). Financial Management: Theory and Practice, Ed 13. Ohio: South-Western Cengage Learning.

After calculating the Total Cash Flow for all three scenarios, the Internal Rate of Return (IRR) and Net Present Value (NPV) for the project can be calculated as well. See Question 3 for details regarding WACC calculation. The IRR and NPV for each scenario are shown in Table 4 below:
Table 4: IRR and NPV4
IRR NPV Weak $0 -$12M Average 7% -$2.18M WACC = 8.78% Strong 13% $6.05M

Finally, the Expected Rate of Return is calculated by multiplying the NPV for each scenario by…

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