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The expected value of project is negative $1.67M, and therefore deemed risky from our perspective.

Table 5: Expected Value Analysis

Weak Average Strong NPV -$11,995,012.01 -$2,177,050.14 $6,047,687.74 x x x Probability 20% = 50% = 30% = EXPECTED VALUE -$2,399,002.40 -$1,088,525.07 $1,814,306.32 -$1,673,221.15

3) What is the project’s cost of equity? What is the appropriate discount factor to use for evaluating the refrigerator project? Without factoring in Tesca’s debt, the project’s cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which essentially tells us how much Tesca’s investors can expect in return, given the company’s level of risk and rates of return. The CAPM formula is as follows:

Rs = Rrf + (Rm) β

Rs = Rate or Cost of Common Stock Rrf = Risk Free Rate Rm = Market Risk Premium β = Stock’s Relative Risk

Brighman and Ehrhardt (2011)5 indicate that many companies use the 10-year Treasury note rate for their Risk Free Rate (Rrf); therefore Tesca’s Rrf = 3% or 0.03. The Market Risk Premium is based on the S&P 500 forecast of 6%. Finally, the Beta (β) or the amount of risk associated with Tesca’s stock relative to the market, is established at 1.30. When these values are factored into the CAPM formula, the cost of equity for this project is equal to 0.108 or 10.8%. According to Investopedia, the cost of equity can be interpreted to mean: that Tesca’s refrigerator project

Table 5: Expected Value Analysis

Weak Average Strong NPV -$11,995,012.01 -$2,177,050.14 $6,047,687.74 x x x Probability 20% = 50% = 30% = EXPECTED VALUE -$2,399,002.40 -$1,088,525.07 $1,814,306.32 -$1,673,221.15

3) What is the project’s cost of equity? What is the appropriate discount factor to use for evaluating the refrigerator project? Without factoring in Tesca’s debt, the project’s cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which essentially tells us how much Tesca’s investors can expect in return, given the company’s level of risk and rates of return. The CAPM formula is as follows:

Rs = Rrf + (Rm) β

Rs = Rate or Cost of Common Stock Rrf = Risk Free Rate Rm = Market Risk Premium β = Stock’s Relative Risk

Brighman and Ehrhardt (2011)5 indicate that many companies use the 10-year Treasury note rate for their Risk Free Rate (Rrf); therefore Tesca’s Rrf = 3% or 0.03. The Market Risk Premium is based on the S&P 500 forecast of 6%. Finally, the Beta (β) or the amount of risk associated with Tesca’s stock relative to the market, is established at 1.30. When these values are factored into the CAPM formula, the cost of equity for this project is equal to 0.108 or 10.8%. According to Investopedia, the cost of equity can be interpreted to mean: that Tesca’s refrigerator project