577 Words3 Pages

Caledonia Products
FIN/370
Caledonia Products
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?
The projected free cash flow for the first year of the venture was 35% of the total sales. This number increased by 5% the following year to 41% of total sales. For the next two years the cash flow stayed consistent at 35% of total sales. The last year of the project provided a 30% free cash flow from total sales.
The accounting profit earned for the five years $29,816,000, which was a 77% profit from the original investment and all expenses.
Cash flow prepares on cash basis means cash flow equals cash paid and received during the year. Cash flow is more vibrant and holds to the true value. Cash flow is concerned with the movement of money in and out of a business.
The concept of accounting profit can be somewhat narrow with its results only looking at income and expenses at a certain point in time and is taxable.
By comparing the information provided from the two reports the free cash flow information from will provide the company with a much truer understanding how the project will be performed. Comparing the company’s net income to its actual cash generated, an investor can determine whether the company is more aggressive or conservative in accounting for its performance.
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?
Year 1 - Free Cash Flow: 7,512,000; Accounting Profits Earned: 7,154,500
Year 2 - Free Cash Flow: 14,972,000; Accounting Profits Earned: 12,340,000
Year 3 - Free Cash Flow: 15,288,000; Accounting Profits Earned: 14,110,000
Year 4 - Free Cash Flow: 8,736,000; Accounting Profits Earned: 8,190,000
Year 5 - Free Cash Flow:

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