Ramona Beaton, Vanessa Hall
March 1, 2012
Caledonia Products Integrative Problem
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? Ans: When analyzing whether to undertake a project, Caledonia needs to focus on free cash flows opposed to the accounting profits because free cash flows is revenue that can be used or reinvested in similar or future projects because it is money that has been received. If Caledonia chose to focus on the accounting profits the profit would be much lower because of depreciation. Since depreciation is considered an expense the greater the depreciation the greater the costs to the organization.
What are the incremental cash flows for the project in years1 through 5 and how do these cash flows differ from accounting profits or earnings? Ans: The incremental cash flows for the project for the years 1 through 5 are initial investment outlay compromising of cash expenditures, working capital, cash flow from sales and investments on tax credits. Also the operating cash flow from net revenue of expenses and tax liabilities along with salvage value; meaning the liquidation of sales of an investment from a business not sustainable.
What is the project’s initial outlay? Ans: The projects initial outlay is the cost of new plant and equipment which is $7,900,000 plus shipping and installation which is $100,000 which equals $8,000,000. The initial outlay is figured by adding the costs of the projects for investment or expansion.
PV= rate 15%, 5yrs, 100,000
. NPV= 100,000/ (1+10) +100,000/ (1+10) +100,000/ (1+10) +120,000/ (1+10) = 6.899
An innovative project would have an effect on the cash flows of the firm’s Other projects or investments however the effects could...