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Star Appliance Star Appliance Case Study Situation: Star Appliance is looking to expand their product line and is considering three different projects: dishwashers,
which conserved both energy and water. As a result of this product, Maytag became an ENERGY STAR appliance manufacturing partner, teaming up with the U.S. Department
Department Stores and Specialty Shops, Toy Kingdom, Ace Hardware, Surplus Shops, The Home, Star Appliance, Family Drugs plus many more. Bench Bench began in 1987
was opened in China at the beginning of the year. Best Buy partnered with Jiangsu Five Star Appliance Co. The Chinese company has more than 135 stores in eight provinces
appliance manufacturer to be accepted as a partner and to factory label their appliances with the U.S. Department of Energy (DOE) and U.S. Environmental Protection
Submitted by fantaorange on December 4, 2006
Category: Business
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Star Appliance Case Study
Situation:
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Conclusion:
Which Projects?
After calculating the Net Present Value (NPV) and the Internal Rate of Return (IRR) for each project, I have determined that both the dishwasher and the trash compactor projects should be pursued. Both of them have shown positive NPVs at the new discount rate of 11.58% (WACC). Another indicator that told me that these two projects should be pursued by Star was that they both yielded IRRs greater than the given hurdle rate. The disposal did not meet these requirements and therefore should not be undertaken.
How to Fund the Projects?
Based on the optimal capital structure analysis, they should pursue as 70% debt proportion, which will give them the lowest cost of capital at 11.58%. Currently Star has no debt in their capital structure, so these new projects should begin to add debt to the company. However, no matter what debt and equity proportions are chosen for each project, the discount rate of 11.58% should be used, as the capital budgeting decisions should be independent of the financing decisions.
Cost of Capital: Current Capital Structure
Gordon Growth Model: (Re = Div Yield + g)
I first solved...
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