Michelle M. Rayford, Peter Pontone, and Sibylle Letzelter
June 18, 2012
Caledonia Products Integrative Problem
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 …show more content…
The initial outlay of the project is calculated as follows.
CAPEX + NOWC
= ($7,900,000 +$100,000) = ($100,000)
The initial outlay for the project is $8,100,000.
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
. The formula for Net Present Value (NPV) is as follows
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%.