FIN 370
As a newly assigned assistant financial analyst at Caledonia Products, Team D has been charged with
calculating the cost of two projects, projected returns, cost of equipment, and finally a recommendation
as to which project to pursue and why. In order to make a recommendation we need all potential cost
incurred, unit price, projected sales, and market information.
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 …show more content…
The Net Present Value application is the preferred route to take because it is most used assumption when trying to maximize wealth.
Lease vs. Buy
Factors that affect Caldonia’s decision to buy or lease the equipment are as follows;
Benefits of purchasing the equipment for the projects are that it may be difficult to find a company that
would lease the equipment because of the exclusivity of the task the equipment performs. Although the
equipment is expensive it could perform the task needed for either project that Caldonia decides on.
Additionally, the Equipment for project A has a short life cycle of three years and would be difficult to
find a company willing to lease it.
Benefits to leasing the equipment needed for the project is the depreciation, the equipment if purchased
would be sold at a loss because it would be difficult to resale the equipment once the project is
terminated because the equipment provides an exclusive task and may be obsolete in five years. In
Addition, the life cycle of the equipment for B is nine years which would still have use the five years
needed for the project. So, it may be feasible for a company to lease this