Neil Young, Ciera Ratliff, Sharyl Stewart

6/9/13

FIN/370

Caledonia Products Integrative Problem

Mini-Case Questions

Ms. Nicole L. Givens

1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the projects when analyzing whether to undertake the project?

The focus should be on free cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. After correctly examining cash flows an analyze of the timing of the benefit or cost can be done correctly. Incremental cash flows should be looked at the project from the point of the company as a whole; the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project.

2. What are the incremental cash flows for the projects in year 1 through 5 and how do these cash flows differ from accounting profits or earrings? In years through 5 the incremental cash flow data indicates the cash flows peak a year 3 which increased the positive cash flow. It did drop in year for and five but was greater then years 1 and 2. We can see a positive cash flow balance although there was a revenue drop. Incremental cash flow differs from accounting profits because accounting profits include taxes and cash flow does not.

3. What is the project initial outlay? The project initial outlay would be about 100k. The 100k for working capital plus the cost of the plant equipment of 7.9 million and the shipping

4. Sketch out a cash flow diagram for this project.

[pic]

Chart coincides with the excel spreadsheet attached.

5. What is the project’s net present value?

3,956,000/ (1+0.15)^1= 3,440,000

8,416,000/ (1+0.15)^2= 6,363,705

10,900,000/