Bus401 Paper

Caledonia

Your Name

BUS401

Instructors Name

Date

Caledonia

Hello Mr. Morrison. After reviewing everything in the assignment for the new project and considering that we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, I have put together the following answers to the questions that were included in my assignment. Please review the answers to the questions.

A. Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits?

Caledonia should definitely focus on cash flows. We want to make the most money we can and cash flows can be reinvested into the company to make more money.

B. How does depreciation affect free cash flows?

Depreciation is a non cash flow item. It does affect the differential cash flows over the life of a projects because of its effects on taxes. Depreciation is an expense so therefore, the higher the depreciation, the higher the expenses are. With this being said, the profits will become lower and so do taxes which are a cash flow item. So it does not affect free cash flow directly, but it does indirectly.

C. How do sunk costs affect the determination of cash flows.

Simply put, They do not affect the determination of cash flows. The costs have already occurred, regardless of the decision made about the investment. You can call these cost a trial and error cost because they will occur pre investment and usually are used to base a decision on if they want the project or not.

Answers to question D though J can be found calculated on the attached Excel Spreadsheet.

D. The projects initial outlay is $8,100,000 . This is found by adding the Cost of the plant ($7,900,000) + Shipping and installation costs ($100,000) + Increase in working capital ($100,000). The total is the projects initial outlay.

E. In order...