Fin 370 Week 4 Caledonia Products Integrative Problem

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?

Free cash flows are being focused on because it the amount that Caledonia will receive and they will be able to reinvest that amount. Caledonia should analyze the free cash flow so that they are able to see the real amount of value or what the cost may be. The marginal value from the project would be in the incremental cash flow. The earnings would be much less if they were looking at it through the accounting profits. It would be less because of the depreciation would be considered an expense causing a larger expense for Caledonia.

2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?

Y1- $3,956,000

Y2- $8,416,000

Y3- $10,900,000

Y4- $8,548,000

Y5- $5,980,000

The incremental cash flow shows the accounting profits takes the accounting profits and subtracts the additional net working capital and capital expenditure. Accounting profits only take the net operating income minus the income tax expense.

3. What is the project’s initial outlay?

Cost of the equipment 7,900,000

Shipping and installation 100,000

Initial working capital start production 100,000

8,100,000 is the initial outlay

4. Sketch out a cash flow diagram for this project.

5. What is the project’s net present value?

The NPV for question 5 is $16,746,506.02.

6. What is its internal rate of return?

The IRR for question 6 is 77%.

7. Should the project be accepted? Why or why not?

First Caledonia must decide if there will be enough cash flow to pay out each month the bills. If they leased, it could give Caledonia the benefit of bringing down the costs. There could be down side of leasing, this means that Caledonia will not be out of the lease until it has been paid off and the company who leased the property...