# Caledonia Essay

Michelle M. Rayford, Peter Pontone, and Sibylle Letzelter

FIN/370

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 cash flow from the second store on its own to see if

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Question 3

The initial outlay of the project is calculated as follows.

CAPEX + NOWC

= ($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

Year5=$5,980,400

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…