Caledonia Paper Ratios

Given Initial capital expenditure $7,900,000.00 Shipping and installation costs $100,000.00 Life of the initial expenditure 5.00 Salvage value $0.00 Marginal tax rate 34.00% Discount rate 15.00% Net working capital 10.00% Net working capital investment $100,000.00 Fixed costs per year $200,000.00 Sales price(1-4) $300.00 Sales price (5) $260.00 Variable cost of product $180.00

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Units sold 70,000 120,000 140,000 80,000 60,000
Revenues $21,000,000.00 $36,000,000.00 $42,000,000.00 $24,000,000.00 $15,600,000.00
Variable costs $12,600,000.00 $21,600,000.00 $25,200,000.00 $14,400,000.00 $10,800,000.00
Fixed costs $200,000.00 $200,000.00 $200,000.00 $200,000.00 $200,000.00
Gross profit $8,200,000.00 $14,200,000.00 $16,600,000.00 $9,400,000.00 $4,600,000.00
Depreciation $1,600,000.00 $1,600,000.00 $1,600,000.00 $1,600,000.00 $1,600,000.00 net opearting income $6,600,000.00 $12,600,000.00 $15,000,000.00 $7,800,000.00 $3,000,000.00
Income taxes $2,244,000.00 $4,284,000.00 $5,100,000.00 $2,652,000.00 $1,020,000.00
Net income/ Accounting Profits $4,356,000.00 $8,316,000.00 $9,900,000.00 $5,148,000.00 $1,980,000.00
Cash flow $5,956,000.00 $9,916,000.00 $11,500,000.00 $6,748,000.00 $3,580,000.00 Additional net working capital -$100,000.00 -$2,000,000.00 -$1,500,000.00 -$600,000.00 $1,800,000.00 $2,400,000.00
Capital expenditure -$8,000,000.00 Free cash flow -$8,100,000.00 $3,956,000.00 $8,416,000.00 $10,900,000.00 $8,548,000.00 $5,980,000.00

Solution
NPV=
NPV 16,731,095.66

Solution
IRR 77.02%

1. 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? - Essay Question

Caledonia should focus on project free cash