Star Appliance Case Study Situation: Star Appliance is looking to expand its product line and is considering three different designs: dishwashers, garbage disposals, and trash compactors. We want to determine which projects would be worth doing by determining whether they will add value to Star. Therefore, projects that will add the most value to Star Appliance will be worth pursuing. The current threshold rate of 10% should be re-evaluated by determining the weighted average cost of capital (WACC). So, by forecasting each project's cash flows 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: what projects? After calculating the net present value (NPV) and internal rate of return (IRR) for each project, I determined that both the dishwasher and garbage disposal projects should be pursued. Both showed positive NPVs at the new 11.58% discount rate (WACC). Another indicator that told me these two projects should be pursued by Star was that they both produced IRRs above the indicated threshold rate. The divestiture did not meet these requirements and therefore should not be undertaken. How to finance projects? Based on the optimal capital structure analysis, they should pursue a debt ratio of 70%, which will give them the lowest cost of capital of 11.58%. Star currently has no debt in its capital structure, so these new projects should start adding debt to the company. However, regardless of the debt and equity ratios chosen for each project, the discount rate of 11.58% should be used, since capital budgeting decisions should be independent... middle of paper... forecast precise their cash flows. If you have one, you are arbitrarily adding numbers and. The calculated hurdle rate includes a safety margin because the highest measure of King is used. This is not to say that King could never succeed. Increase in threshold rate to cover security projects? The threshold rate should not be adjusted for these security projects. They should use the same minimum cost of capital rate standard, regardless of the project. Even if it is not for profit, we should still look for a positive net present value so that we do not suffer losses. Different required returns for different projects? The minimum rate should not change depending on the project. The hurdle rate is the cost of raising money and should be the same regardless of how the project is financed.