Caledonia Project Cash Flow and Rationing Analysis

1147 WordsAug 9, 20125 Pages
Caledonia Products Cash Flow and Rationing Analysis Mr. Morrison, CEO of Caledonia has requested the assistant financial analyst (Team C) to provide a recommendation of several exclusive projects and provide a report on the capital-budgeting process. The assignments assessment include the incremental cash flows payback period, the projects initial outlay, the project’s cash flow diagram, the net present value, the projects internal rate of return, the project with the best options, and the option to lease or buy. After analyzing the Caledonia Project, Caledonia should focus on project free cash flow as opposed to the accounting profits earned by the project when analyzing if the company should undertake the project because of the cash free offers the company will receive. The company can also evaluate the effectiveness of the benefits and reinvest the cash flow received from the benefits. The only cash flows that Caledonia has interest in is the incremental cash flows; therefore the incremental cash flows are the projects marginal benefits that increase the value from the organization. The incremental cash flows for the project in years one through five changes in net working capital is: The Net Operating Cash Flow - revenue net of expenses and liabilities for the specific period Net Initial Investment Outlay - investment cash credits and the sale of existing or old and non-useful equipment cash expenditures and net cash flows Net Salvage Value - after tax net cash flow for liquidations, terminations, and unmanageable projects businesses owners no longer need. Incremental cash flows are different from earnings and accounting projects merely because of the reasons the Caledonia Company uses the cash. However, because the cost spreads over a period of five years through depreciation, the investments are a non-cash expense. The

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