Caledonia Products Integrative Problem
From: The Assistant Financial Analyst
Re: Cash Flow Analysis and Capital Rationing
Caledonia is a corporation who is interested in adding a new trending project to their project line. The project would only be in production for five years and the company has chosen team A to make an educated recommendation. Tem A will analyze the following: •
Net present value
Internal rate or return
The following analysis is provided to aid in the understanding of Team A’s final recommendation: Free Cash Flows
The focus of what Caledonia receives is the free cash flow. The company should focus on what is received and what can be reinvested. The cash flow allows Caledonia to analyze the actual benefits and the costs involved. If the company calculated the depreciation as an expense, and focused primarily on the accounting profit view the amounts would be substantially lower than what is reflected in the free cash flow.
OPERATING CASH FLOW
2 Year 3 Year
Year 5 Unit sold
120,000 140,000 80,000 60,000 Sales price 300 300 300 300 200 Revenue 21,000,000 36,000,000 42,000,000 24,000,000 15,600,000 Variable costs 12,600,000 21,600,000 25,200,000 14,400,000 10,800,000 Fixed costs 200 200 200 200 200 EBDIT 8,200,000 14,200,000 16,600,000 9,400,000 4,600,000 Depreciation 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 EBIT 6,600,000 12,600,000...
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