Rinkydink
Caledonia
Team A
FIN/370
November 28, 2012
David Brockway
Caledonia
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?
Caledonia Products should focus on free cash flow and not the accounting profits earned by the project. The cash flow received can be reinvested. The company can analyze the timing and benefits or cost by determining their cash flows. The incremental cash flows are the most important to the company because it increases the value of Caledonia
2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?
There are 3 incremental cash flows used for the project. They are net initial investment outlay, net operating cash flow, and net salvage value. These cash flows differ from the accounting projects or earnings because of the way the cash is used by the company. The Caledonia Investment will not treat its cash flows as an expense because the cost is spread over five years through depreciation.
3. What is the project’s initial outlay? | 1 | 2 | 3 | 4 | 5 | Units sold | 70000 | 120000 | 140000 | 80000 | 60000 | Sale price | $300.00 | $300.00 | $300.00 | $300.00 | $260.00 | | 180 | 180 | 180 | 180 | 180 | Rev from sale | $21,000,000.00 | $36,000,000.00 | $42,000,000.00 | $24,000,000.00 | $15,600,000.00 | Variable cost - | $12,600,000.00 | $21,600,000.00 | $25,200,000.00 | $14,400,000.00 | $10,800,000.00 | fixed cost- | $200,000.00 | $200,000.00 | $200,000.00 | $200,000.00 | $200,000.00 | EB | $8,200,000.00 | $14,200,000.00 | $16,600,000.00 | $9,400,000.00 | $4,600,000.00 | depr - | $1,600,000.00 | $1,600,000.00 | $1,600,000.00 | $1,600,000.00 | $1,600,000.00 | EBIT | $6,600,000.00 | $12,600,000.00 | $15,000,000.00 | $7,800,000.00 | $3,000,000.00 | 34% | $2,244,000.00 | $4,284,000.00 | $5,100,000.00 | $2,652,000.00 |
Team A
FIN/370
November 28, 2012
David Brockway
Caledonia
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?
Caledonia Products should focus on free cash flow and not the accounting profits earned by the project. The cash flow received can be reinvested. The company can analyze the timing and benefits or cost by determining their cash flows. The incremental cash flows are the most important to the company because it increases the value of Caledonia
2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?
There are 3 incremental cash flows used for the project. They are net initial investment outlay, net operating cash flow, and net salvage value. These cash flows differ from the accounting projects or earnings because of the way the cash is used by the company. The Caledonia Investment will not treat its cash flows as an expense because the cost is spread over five years through depreciation.
3. What is the project’s initial outlay? | 1 | 2 | 3 | 4 | 5 | Units sold | 70000 | 120000 | 140000 | 80000 | 60000 | Sale price | $300.00 | $300.00 | $300.00 | $300.00 | $260.00 | | 180 | 180 | 180 | 180 | 180 | Rev from sale | $21,000,000.00 | $36,000,000.00 | $42,000,000.00 | $24,000,000.00 | $15,600,000.00 | Variable cost - | $12,600,000.00 | $21,600,000.00 | $25,200,000.00 | $14,400,000.00 | $10,800,000.00 | fixed cost- | $200,000.00 | $200,000.00 | $200,000.00 | $200,000.00 | $200,000.00 | EB | $8,200,000.00 | $14,200,000.00 | $16,600,000.00 | $9,400,000.00 | $4,600,000.00 | depr - | $1,600,000.00 | $1,600,000.00 | $1,600,000.00 | $1,600,000.00 | $1,600,000.00 | EBIT | $6,600,000.00 | $12,600,000.00 | $15,000,000.00 | $7,800,000.00 | $3,000,000.00 | 34% | $2,244,000.00 | $4,284,000.00 | $5,100,000.00 | $2,652,000.00 |