Caledonia Products Integrative Problem Fin 370

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Caledonia Products Integrative Problem Shaneal Gaither, Nicolle Istre, Tara Shulfer, Laura Curry FIN/370 October 8, 2012 Instructor: Chrissy Helbling 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 free cash flow rather than accounting profits. The reason being is because with free cash flow that money coming in can be immediately reinvested into different projects or areas of the firm to start earning higher revenue. By focusing on the incremental cash flows Caledonia can analyze and determine the benefits and the costs to any project. Incremental cash flows will highlight the marginal benefit…show more content…
Outlays are securities that are used to make purchases; or to improve an asset that is already held and that will increase the value of Caledonia Products for a length of time. Caledonia Products has allocated $100,000.00 to get production started for the company; $7,900,000.00 to purchase a new operating facility along with equipment. The cost of equipment and plant, plus shipping and installation charges, plus net working capital equals a project’s initial outlay. The cost for shipping and installation is an additional $100,000.00 resulting in $8,100,000.00 in initial cash flow. These are the main examples of capital outlay. When Caledonia Products are calculated accurately, it illustrates the financial wealth of the company. While reviewing the company’s cash flow, it appears that Caledonia is reaching their financial planning goals. The initial outlay is $3,956,000.00 in year 1; $7,432,000 in year 2; $10,300,000 in year 3; $8,056,000 in year 4; $5,680,000 in year 5. Therefore, through years one through five, Caledonia has an initial outlay of…show more content…
What is the project’s net present value? When attempting to finance a project, it is important to know the financial health of the company. The net present value aids with analyzing the profitability of a project. It demonstrates the difference between the present value of the cash inflows and the cash outflows (Titman, Keown, & Martin, 2011). When a negative net present value is obtained, it is a sure indicator that the firm should not continue to invest in a project. NPV (0.34 -$2,000,000.00 -$900,000.00 -$1,200,000.00+$2,100,000.00+$2,100,000.00) -100,000.00 = $23,285,773.76 6. What is its internal rate of return? The internal rate of return is a form of a discount rate. The IRR allows the current value of all the cash flows to be equal to zero. In the Caledonia projects the internal rate of return is 53.78%. This percentage shows that the project will generate success and growth for Caledonia. 7. Should the project be accepted? In acceptance of the project the company will increase their NVP. This is the Net Present Value; it measures the value added to shareholder wealth from an investment project.

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