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Tesco: Evaluating The Cost Of Two Compressors That Will Be Used In The Refrigerator - Case Study Example

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Tesco: Evaluating The Cost Of Two Compressors That Will Be Used In The Refrigerator

Meanwhile, the paper evaluates cost of equity that is used to keep a share price that is essential to investors to evaluate the performance of various projects. On the basis of the various evaluation of the project, we recommend the way forward for the Tesco works.
Question1
The energy cost situation should be considered of the significant in evaluating the feasibility of the project in the competitive market. The productivity of the projects will depend on the energy cost situation. In case, the energy costs are high the project will be extremely expensive that will have inadequate return. Understanding the cost effectiveness of the energy cost will assist indicate the significant of implementing energy cost in the project plan. The energy efficiency cost efficacy is ascertained by comparing the benefits of investments with the costs. The significant of the energy cost situation will be evaluated using overall cost effectiveness of the energy efficiency. The discount rate used to discount, the NPV of the annual costs and benefits is obtained and evaluated.
Given that the energy cost will occur upfront and the returns occur over time, the lower discount rate will prove the cost effectiveness will be positive. Since this is the business project, the discount rate will be the weighted average cost of the capital that is approximately 12 percent. The WACC equation is the cost of each capital constituent multiplied by its proportional weight and then adding as shown in the spreadsheet. The calculate WACC is approximately 11.6 percent that is lower than the discount rate and indicate there is significant of energy cost situation. The benefit is positive that indicate the project is cost effectiveness in future. Question 2 The project cost of equity is initially what the business to keep a share price that is essential to investors to evaluate the performance of the projects. According to Pratt and Grabowski (2010), the most frequently used method for calculating cost of equity is based on the capital asset pricing model where cost of equity is given by risk free rate plus beta multiplied by equity market risk premium. The cost equity is approximately 14.45 percent that can be adjusted to increase or decrease the risk taken by the business on the investment projects. Thus, the appropriate discount factor to use when evaluating the refrigerator is the WACC that is approximately 11.6. The WACC is used to evaluate the refrigerator project because it comprises both the cost of equity and the cost of debt of the project that are vital in determining the feasibility of the project. Meanwhile, using the 11.6 percent has a discount rate it will be essential in evaluating the NPV of investment outlays of the project that will be used to establish the profitability of the project in the future. Question 3 The evaluation of the present value calculated under the warranty cost will indicate which of the two compressors should be used in the refrigerator. The compressor with higher warranty cost is cheaper to implement, and the one with lower warranty cost is expensive to implement. Thus, we will evaluate the present value criteria to ascertain which of the two compressors is best to be used in the refrigerator. The present value of the MC – 004 and TS – L12 are both equal has calculated in the spreadsheet for both scenarios. Thus, the compressor with the highest present value is ...Show more

Summary

The analysis deals with the average demand scenario that indicates the sensitivity of the project and if the project should be accepted based on the risk involved in implementing the project. The paper evaluates the behavior of cash flows for the next 20 years and examines the assumption used to forecast the cash flows…
Author : remingtonondric
Tesco: Evaluating The Cost Of Two Compressors That Will Be Used In The Refrigerator essay example
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