Fin370 Week 4

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Caledonia Products Integrative Problem Fin/370 Caledonia Products Integrative Problem 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the projectwhen analyzing whether to undertake the project? Caledonia should focus on free cash flow rather than accounting profits because the free cash flow is what the organization receives, which can then be reinvested. Through thoroughly analyzing the free cash flow, Caledonia would be able to determine the actual benefit or the cost involved. The organization should primarily focus on the incremental cash flow because the incremental cash flow holds a marginal benefit from the project. Depreciation is considered to be an expense item which means that the greater the depreciation, the larger the expense will be to the organization. Therefore, if Caledonia was looking at the project from an accounting profit view, the profit would be much lower than that of the free cash flow. 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? In business finance there are a number of different cash flows. Caledonia will use the following incremental cash flows for this project in years 1 through 5: Net initial investment outlay. The is outlay is comprised of cash expenditures, changes in net working capital, net cash flow from the sale of existing or old and non-useful equipment, and investment tax credits. Net operating cash flow. This cash flow is the revenue net of expenses and tax liabilities for the time period under consideration. Net salvage value. The net salvage value is the after tax net cash flow for the termination, liquidation or sale of an investment, project or business that is financially unsustainable or which the owner simply no longer wishes to keep. This
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