# Caldonia Products Integrative Essay

1260 Words May 2nd, 2012 6 Pages
Caledonia Products Integrative Problem
Adam Pugh, Estee Vargas-Nichols, Jenny Clark
University of Phoenix
FIN 370
Cassandra Ryder
April 26, 2012

Caledonia Products Integrative Problem
When companies are determining whether an investment must be undertaken, they decide if the investment will add to or detract from the value of the firm. There are several determining factors in evaluating an investment. These include project free cash flow versus accounting profits, incremental cash flows, net present value, and internal rate of return. Caledonia Products is deciding whether to undertake a new investment project. The firm must determine the cash flows for the life of the project, calculate the net present value and the internal
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The financial assistant must analyze two mutually exclusive projects. Each project has an 11% rate of return and a life span of five years (Titman et al., 2011). Consequently, profits are lowered and so are the taxes which are cash flow it.
Caledonia Products initial cash outlay equals the cost of new plant facilities and equipment plus shipping and installation costs plus the increase in working capital. This is the cost of entering into the project:
Cost of new plant and equipment: \$ 7,900,000
Shipping and installation costs: \$ 100,000
Working capital requirement of \$ 100,000
Total \$ 8,100,000

Table 1.1 Cash Flow Diagram

Year | 0 | 1 | 2 | 3 | 4 | 5 | Unit Sales | | 70,000 | 120,000 | 140,000 | 80,000 | 60,000 | Project Revenues | | 21,000,000 | 36,000,000 | 42,000,000 | 24,000,000 | 15,600,000 | Variable Expense | | 12,600,000 | 21,600,000 | 25,200,000 | 14,400,000 | 10,800,000 | Gross Profit | | 8,400,000 | 14,400,000 | 16,800,000 | 9,600,000 | 4,800,000 | Fixed Expenses | | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | Depreciation | | 1,600,000 | 1,600,000 | 1,600,000 | 1,600,000 | 1,600,000 | Net Operating Income | | 6,600,000 | 12,600,000 | 15,000,000 | 7,800,000 | 3,000,000 | Taxes | | 2,244,000 | 4,284,000 | 5,100,000 | 2,652,000 | 1,020,000 | Net operating profit after taxes | |