Caladonia Products Integrative Problem

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Caladonia Products Integrative Problem
Tonia Tolliver, Suany Gonzalez, Teresa Powell, Victor Estrada, and Tracy Harriss FIN/370
November 8th, 2010
Joe Brennan

Caladonia Products Integrative Problem
Every new employee is faced with the challenge of proving him or herself before being trusted to complete a task on his or her own without supervision. The new financial analyst at Caladonia has been employed for two months and has proven to be a wise hiring decision based on the Chief Executive Officer (CEO) view however he is still hesitant to give the assistant any large responsibilities without supervision. The CEO has tasked the assistant with both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects (Keown, Martin, Perry, & Scott, 2005). The lack of experience on the assistants part has also lead to the CEO requesting not only that the assistant provide a recommendation but also to respond to a number of questions aimed at judging the assistants understanding of the capital budgeting process (Keown, Martin, Perry, & Scott, 2005). Financial Assistants Assignment

The financial assistant received the important assignment by memorandum from the CEO. The memorandum stated that the company is considering the introduction of a new product (Keown, Martin, Perry, & Scott, 2005). Caradonia is currently at a 34% marginal tax bracket with a 15% required rate of return or cost of capital (Keown, Martin, Perry, & Scott, 2005). The new project is estimated to last five years and then be terminated because of being a fad project (Keown, Martin, Perry, & Scott, 2005). The financial assistant must analyze two mutually exclusive projects. Each project has an 11% rate of return and a life span of five years (Keown, Martin, Perry, & Scott, 2005). The following table (table one) shows the expected cash flows for each project. Table One

Estimated Cash Flows of Caldonia Products Project A and Project B

|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 |

Questions to Answer
The financial analyst has been tasked with answering five questions. 1. What is each projects payback period?
2. What is each projects net present value?
3. What is each projects internal rate of return?
4. What has caused the ranking conflict?
5. Which project should be accepted? Why?
Answers to Questions
Question One – Payback Period
Project A. The payback period for Project A is 3.125 years. To calculate the payback period for project A, the analyst used the following formula:

3+ (100,000/32,000) = 3.125

Project B. The payback period for Project B is 4.5 years. To calculate the payback period for project B, the analyst used the following formula:

4+ (100,000/200,000) = 4.500

Based on the payback periods, the assistant determined that Project B assumes even cash flow throughout year 5.

Question Two – Net...
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