Fin370 Essay

311 Words2 Pages
Caledonia Products Integrative Problem FIN/370 March 25, 2013 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? Caledonia should focus on project free cash flows because the businesses can reinvest cash flows. Caledonia interest lies in incremental cash flows. Incremental cash flows increase the value from the organization because they are projects marginal benefits. 2. What are incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings? Net operating cash flow which is revenue of expenses and liabilities. Net initial investment outlay which is investment cash and the sale of old equipment cash expenditures as well as net cash flows. Net salvage value which is the after tax net cash flow projects businesses will not use. The incremental cash flows are different because of the way Caledonia operates with the cash. 3. What is the project’s initial outlay? The projects initial outlay was $8,100,000. This is the cost of a new plant, plus shipping and installation costs plus increase in working capital. 4. Sketch out a cash flow diagram for this project. 3,956,000 8,416,000 10,900,000 8548,000 5,980,000 -8,100,000 5. What is the project’s net present value? The project’s net present value is 16,731,096 6. What is its internal rate of return? The internal rate of return (IRR) is 77% 7. Should the project be accepted? Why or why not? The project should be accepted. While the start up cost and the turnaround for money return will take up 2-3 years to get back; the steady flow of tenant and monthly rent will
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