Tesca Work

Michael Burton, CEO,

Tesca Works, Inc.

Dear Mr. Burton

Constant Consulting would like to thank you for the opportunity to consult Tesca Works, Inc. on your potential expansion project. We have analyzed and evaluated the sales and cost forecasts for the expansion into the energy star refrigerator manufacturing business. We make the following recommendations.

Energy cost and usage, especially in the State of California, is a very important issue. During peak hours in the summer, frequent flex alerts and rolling black outs occur. Consumers can do their part by reducing the consumption of energy. In the past 10 years, advances in the manufacturing of energy efficient appliances has made it easier to reduce electric bills and increase efficiency in residential appliances. According to Southern California Edison, kitchen appliances, specifically refrigerators and freezers make up approx. 17% of the total residential electric bills. New, energy efficient refrigerators use 68% less energy than 20 year old models. Given the potential cost savings to families in their energy bills by installing energy star models, we feel this issue is of high importance.

When evaluating the additional risk associated with a new venture and entering a new product market for your company, we have identified several factors which we determined will affect your beta and discount rate. These include the ramp up costs, the amount of debt Tesca will incur, along with the length of the project, and the delay to year 3 for sales to begin, we estimate there will be an approximate 15% increase in your beta and interest rate, which will result in your beta being raised to 1.5, and your interest rate increasing to 7.5%. Your beta will be on the high end of the industry average, and your interest rate will still fall within the “A” rating you currently have associated with your company. Once you have established your company as a leader in the home appliance market, your risk should...