Caledonia Products Integrative Problem

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Caledonia Products Integrative Problem FIN/370 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 of the amount of income that it will receive and the increase in income will allow Caledonia to invest in more and with a lot more financial support. Caledonia can and should analyze the Free Cash Flow and with the data analyzed it will determine the accurate sum of income or expense it can count on. The marginal value from the chosen project would be the crucial part of the cash flow. Whatever the profit would be from the project would be below the norm if using the accounting profits method. The amount would be less because of the depreciation that is considered a debt that would make a considerable 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? The incremental cash flows are calculated by taking the net profit, subtracting taxes, and adding depreciation expense. These incremental cash flows are different from an accounting profit because they take into account taxes and depreciation. A typical accounting profit would only look at the net profit of a product. Also, incremental cash flows take other costs into account, if available. In this particular case, the information needed to figure out the incremental cash flow of the product was limited. However, if the information was available, it would be useful to figure out if the sale of this product took away from the sale of another Caledonia product. Incremental cash flows consider this and other circumstances such as opportunity cost. Year | Net Profit(units sold x price per unit) – ((units sold x
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