Financial Management

Questions ch.12

1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project? When analyzing whether to undertake the project? Why should Caledonia focus on project free cash flow as opposed to the accounting

to the accounting profits earned by the project when analyzing whether to undertake the project? Caledonia Products should focus on the project free cash flow however, they are the flows that the firm can receives and can reinvest. Caledonia Products would only be interest in the incremental cash flow because it holds a marginal benefit from the project. However, if Caledonia Products were interested in the project from an accounting profit standpoint the profit would be lower than the free cash flow side.

No company is exempt from having free cash flow management because it is very necessary in providing the business with the largest profits possible.

Describe factors Caledonia must consider if it were to lease versus buying.

Caledonia Products must consider factors if it were to lease: Cash flow – a business can conserve its cash flow by leasing. Credit rating – the company has not established a credit rating sufficient to support a mortgage. Maintenance – the property owner is responsible for maintaining the property. Property – the leaser have been unable to find a suitable property that is for sale. Real estate values – the facility found meets the needs of the business however, it is located in an area where property values are declining. Mobility – the leaser is not sure that the facility will meet the future needs of the business.

Tax Savings – rent is deductible as a business expense.

Factors Caledonia must consider if it were to buy: Long-term saving – in the long run, purchasing a facility is usually cheaper than leasing. Location – types of businesses, location is the most important factor. Control – there are substantial renovations that a buyer would want to make to the...