Bus401 Final Paper

Final Project

BUS401: Principles of Finance

Instructor Grant Magnuson

April 29, 2013

Final Project

When a project is presented as being considered for investment by an organization, it is of the utmost importance that the financial feasibility of the project be reviewed and presented prior to the final decision on investment being made. Serious financial ramifications can be felt from poor decision making when it comes to capital budgeting. Taking on projects that have not been properly vetted to ensure that it will produce the required results can have ill effects on the livelihood of an organization. Reviewing a project for financially relevant metrics such as cost, cash flows, internal rate of return, and net present value help to determine if the project is a good fit for the organization. Other important factors that must be considered are market analysis, and risk. Below, each of these important factors will be reviewed and a recommendation made in regards to the project proposed for Caledonia Products.

In the case of the proposed project, Caledonia Products focus should be firmly on that of cash flows. Principle number one of finance is that cash flow is what matters (Keown, Martin & Petty, 2012, p. 4). In other words, cash is king. While the accounting profits of projects or businesses are important, the importance of cash outweighs that. The ultimate reason for focusing on cash flow is the ability it gives to see the timing of the cost or benefit which will be incurred by the organization. Additionally, the incremental cash flows are the most important place for Caledonia Products to look to see the true value of the project. This is because the incremental cash flows identify the difference between the cash flows the company will produce

with or without the project (Keown, Martin & Petty, 2012, p. 4). (Answer A)

While depreciation is not directly related to free cash flows, it does have an effect. Depreciation effects free cash flows as an...