The capstone project in many academic institutions is the high point of undergraduate studies in engineering. The transition of graduates to industry is still not optimal, and there is a disparity between the needs of industry and the actual ability of academia to meet these needs. This study examines the role of the capstone project as a pedagogical tool in the age of Industry 4.0 in the field of product development, and as a bridge between academia and industry. The study combines qualitative and quantitative methods, focusing on four stakeholders (academia, industry, students and advisors). The study is based on several sources, such as: semi-structured interviews, questionnaires, observations, and more. The study results indicate that the capstone project is important and valuable for industry and academia, as well as being perceived by students as the most important undergraduate course. Nevertheless, the results reveal that it has many gaps and shortcomings and illuminate the need for a deep perceptual and structural change. Academia should reconsider projects' length and define milestones in which independent learning is optimally enabled. The projects' contribution to academic institution reputation, should be considered when defining the project goals. Coping with the challenges and gaps found in this study, the project can also be used in order to reduce incongruities, while preparing the students in a better way for their professional role in changing environment.