Essay on Caledonia Products Integrative Problem

689 Words Jan 15th, 2012 3 Pages
Caledonia Products Integrative Problem
FIN/370
September 11, 2011

12a. Caledonia is considering two additional mutually exclusive projects. 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 32,000 0
4 32,000 0
5 32,000 $200,000 The required rate of return on these projects is 11 percent.

a. What is each project’s
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This gives Project A the higher ranking.

12e. After reviewing how long the payback period would be, what the Net Present Value is, and the Internal Rate of Return it has been concluded that Project A would be a better option. The payback period is a short time frame which helps Caledonia profit from the project and move on to a new project. As for the Net Present Value, there may be a $425.66 in favor of Project B but Project A will still pay off the money that they owe sooner than they would with Project B. The Internal Rate of Return will profit Caledonia more Project A is chosen. Project A offers 3.16% more of an Internal Rate of Return than Project B.

Describe factors Caledonia must consider if they were doing a lease versus buy.

Some factors that Caledonia has to think about are if the Net Present Value of the item or facility is worth buying. They should also consider the tax savings that they may gain and potential money that they will save. Caledonia has to think about how much time they will have the item or how soon it will become outdated. If the equipment is going to cost more to update then they might want to consider leasing the equipment instead. As for the facility, if they plan to stay in the building for a short amount of time then the business may want to lease the

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