Caledonia Products Integrative Problem

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Caledonia Products Integrative Problem FIN/370 Finance for Business The following outlines the analytical data and procedures used by a financial analyst who is working for the capital budget department at Caledonia Products. The organization has asked Team A to evaluate the potential risk involved in an upcoming transaction and identify several options in how to proceed. Because this is the team’s first assignments dealing with risk analyzes the team has been ask to further explain the details. The organization analysis will focus on free cash flows, projection of cash flows, projects initial outlay, cash flow diagram, net present value, internal rate of return, and whether or not the project should be accepted. The impact of free cash flows Team A believes that Caledonia should put greater emphasis on free cash flows rather than accounting profits. Evidence exists that the accounting profits will be earned by the project because there is a positive cash flow to the shareholders. With any investment there is the expectation that there will be an increase to the firm’s cash flow. Free cash flow is the total cash available to creditors who have invested their monies to finance the project. Accounting profits includes costs such as depreciation, interest, and taxes to run a business therefore it should not affect free cash flows. The period of time given for the free cash flows cover year zero through five and reveal the financial benefit of the project. Financial projections for duration of project There is annual working capital requirement of $100,000 to initiate the project. An increase is shown for years one through three. Net working capital will equal 10% of the sales revenue for each year. In year one free cash flow is $2,100,000 in year two $3,600,000, a fist year increase of 53%, In year two a 23% increase, in year three to four a decrease

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