Caledonia Essay

956 Words Aug 31st, 2012 4 Pages
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Essay Sample
Caledonia Products Integrative Problem 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

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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.
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
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