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Caledonia Essay

982 words - 4 pages

Caledonia Products Integrative Problem
Michelle M. Rayford, Peter Pontone, and Sibylle Letzelter
June 18, 2012
Laura Haase

Caledonia Products Integrative Problem
Question 1
Caledonia should focus on project free cash flows as opposed to accounting profits earned because free cash lows show the value of the projects. Caledonia needs to isolate the project independent from regular company financials to understand how the project will contribute value to the business. Accounting profits earned will take into account the entire business and it will not isolate the project. A good example is dry cleaners that decide to open up a second location. The owner needs to look at the ...view middle of the document...

Profits indicate how much money is left after the company has sold its good and service from a performance standpoint. A company needs to be profitable, but it also needs to ensure there is cash available when needed. The cash flow statement allows the company to plan for purchasing raw materials and paying off taxes, debt and any other expenses. A company can be profitable, but can still go bankrupt because it does not have money to pay the bills or purchase raw materials.
Question 3
The initial outlay of the project is calculated as follows.
= ($7,900,000 +$100,000) = ($100,000)
= $8,100,000
The initial outlay for the project is $8,100,000.
Question 4
For cash flow diagram, you need to consider your Operating cash flow plus or minus your change in working capital. For this project
Initial cash outlay: $8,100,000
Year 1 = $3,956,000
Year 2= $8,416,000
Year 3=$10,900,000
Year 4=$8,548,000
Question 5
. The formula for Net Present Value (NPV) is as follows
NPV= (-8,100,000)+3,956,000/1.15+8,416,000/1.15²+10,900,000/1.15³+8,548,000/1.154+5,980,000/1.155=$16,731,096
The NPV for this project is: $16,731,096
6. The project’s Internal Rate of Return is as follows
6. At IRR, NPV = 0
0 = -8,100,000 + 3,956,000/ (1 + IRR) + 8,416,000/ (1 + IRR) 2 + 10,900,000/ (1 + IRR) 3 + 8,548,000/ (1 + IRR) 4 + 5,980,000/ (1 + IRR) 5
Solving for IRR,
IRR = 77%
The IRR for this project is 77%.
Question 7
Should the project be accepted? Why or why not?
The project should be accepted because of a strong Net Present Value as well as a High Internal Rate of Return. Using NPV and IRR as your benchmarks to evaluate your projects are the two most common used measures. A higher NPV and IRR will show a stronger investment opportunity.

Question 8...

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