Caledonia Products Integrative Problem

RUNNING HEAD: Caledonia Products Integrative Problem

Caledonia Products Integrative Problem

Finance For Business FIN/370

Amanda Anderson, Andrea Gould, Andrew Kelly, Diana Ross, Thomas Sayle, and Jarvis Wright Sr.

University of Phoenix

July 10, 2010

Instructor James Wong

12. Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:

YEAR          PROJECT A               PROJECT B

0                 −$100,000                −$100,000

1                  32,000                          0

2                  32,000                          0

3                  32,000                           0

4                  32,000                           0

5                  32,000                        $200,000

The required rate of return on these projects is 11 percent.

a. What is each project’s payback period?

Project A payback period is 3.13 years and Project B payback period is 4.5 years.

b. What is each project’s net present value?

Project A NPV is 60000.00 and Project B is 100000.00

c. What is each project’s internal rate of return?

Project A IRR is 18.03% and Project B IRR is 14.87%

d. What has caused the ranking conflict?

The rankings conflict is a result of differing reinvestment assumptions made by the NPV and IRR decision criteria. The NPV criterion assumes that cash flows over the life of the project can be reinvested at the required rate of return or cost of capital, while the IRR criterion assumes that the cash flows over the life of the project can be reinvested at the internal rate of return.

e. Which project should be accepted? Why?

It is clear the Project B should be accepted because it has the largest NPV. The NPV criterion is preferred because it makes the most acceptable assumption for the wealth maximizing firm.

Describe factors Caledonia must consider if they were doing a lease versus buy.

Caledonia must consider that if they were to...