495 Words2 Pages

Week Four Learning Team Assignment: Caledonia Products Integrative Problem
Team
FIN 370: Finance for Business
Monday, September 5, 2012
Professor Amy Grover
Integrative Problem Team C held a joint conference to debate factors related to a directive to respond to the Caledonia Products Integrative Problem and consider factors related to a potential lease.
12. Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:
Year Project A Project B
0 -$100,000 -$100,000
1 $32,000 $0
2 $32,000 $0
3 $32,000 $0
4 $32,000 $0
5 $32,000 $200,000
The required rate of return on these projects is 11 percent.
a. What is each project’s payback period?
Answer:
Project A (PBP): 3.13 Years
Project B (PBP): 4.50 Years
b. What is each project’s net present value?
Answer:
Project A (NPV): $18,268.70
Project B (NPV): $18,690.27
c. What is each project’s internal rate of return?
Answer:
Project A (IRR): 18.030%
Project B (IRR): 14.869%
d. What has caused the ranking conflict?
Answer:
Project A generates cash flow consistently through vs. Project B generates it later on the project and is not consistent.
e. Which project should be accepted? Why?
Answer:
Project A should be excepted because what the outcome of the NPV and the IRR, which are positive and have a higher outcome.
Lease Considerations
Describe factors Caledonia must consider if they were doing a lease versus buy.
When Caledonia leases it must consider the benefits of reducing the out of pocket cost. A disadvantage to that positive is the product that will be leased, will not be owned until the lease is completely paid in full. Factors Caledonia needs to consider is ensuring there is good enough credit on the line, and there is steady income to pay regular monthly bills on a regular such as

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