...Caledonia Products Integrative Problem Part A. What is each project’s payback period? Payback period = Investment required / Net Annual Cash Inflow Project A: 100,000 / 32,000 = 3.125 years Project B: 5 years. There is no cash inflow until the fifth year when an inflow of $200,000 comes in to offset the investment. To determine payback period it is the following: Payback Period = Y + ( A / B ) where Y = The number of years before final payback year. A = Total remaining to be paid back at the start of the payback year, to bring cumulative cash flow to B = Total (net) paid back in the entire payback year For first case Y=3 (we see in year 4 it is paid back so 3 is year before final payback year) A=100000-(32000*3)= 4000 B= 32000 3+ (4000/32000) 3.125 2nd case Y= 4 because we see the investment is paid in full in year 5 so year before is 4 A= 100000 B=200000 4+(100000/200000) 4.5 Your solutions were slightly off. Part B. What is each project’s net present value? Project A NPV is $18,268 Project B NPV is $18,690 Year Project A Project B At 11% Present value A Present value B 0 -100000 -100000 1 -100000 -100000 1 32000 0 0.900900901 28828.82883 0 2 32000 0 0.811622433 25971.91786 0 3 32000 0 0.731191381 23398.1242 0 4 32000 0 0.658730974 21079.39117 0 5 32000 200000 0.593451328 18990.4425 118690.2656 Part C. What is each project’s internal rate of return? The internal rate of return (IRR) is calculated using Excel with...
Words: 778 - Pages: 4
...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 payback period? Ans. Project A – need 32,000, made 100,000 1st year 100,000/32000 = 3.125 years | Project B – need 20,0000, made 20,000 5th year 20,000/10000=.50 = 4.5 years | 12b. What is each project’s net present value? Project A Project B -100,000 -100,000 32,000 0 32,000 0 32,000 0 32,000 0 32,000 0 32,000 200,000 R = .11 Project A NPV 32,000/1.11+32,000/(1.11)²+32,000/(1.11)³+32,000/(1.11)4+32,000/(1.11)5+32,000/(1.11)6 28,828.83+25,971.92+23,398.12+21,079.39+18,990.44+= 118,268.7-100,000=18,268.7 Project B NPV -100,000 + 200,000(1.11)5= 118,694.36-100,000=18,694.36 NPV Project A = $18,268.70 NPV Project B = $18,694.36 12c. Project A 100,000 = 32,000/(1+r) + 32,000/(1+r)2 + 32,000/(1+r)3 + 32,000/(1+r)4+...
Words: 684 - Pages: 3
...Caledonia Products Integrative Problem As a newly assigned assistant financial analyst at Caledonia Products, Team B has been charged with calculating the cash flows associated with the production of a new fad product which is expected to last for a five year period, provide a recommendation and respond to a number of questions on the capital-budgeting process. They must also factor in whether it should lease versus buying the equipment. Cash Flows versus Accounting Profits Caledonia should focus on free cash flows opposed to the accounting profits earned by the project when analyzing whether to undertake the project because focusing on free cash flow will allow Caledonia to see what all funds they will have available after the project is complete. The company will have to sit down and see what all finances they will need and what all has to be done and see what funds they will have and where they will go and make the final decisions from there. Also by looking at the free cash flows it will allow the company to see if they will have any funds to place on other unrelated projects as well going to pay for other company expenses. The major thing is to really focus on one project at a time and go from there they do not want to have too much put on them at one time and focusing on free cash flows is a way to make that happen for the company. Many different projects require a certain amount of money and to make sure that you have the proper funds to take on all of the project...
Words: 1296 - Pages: 6
...1 Caledonia Products Integrative Problem Christina Smith, Patricia Bryant, Kelley Randall, Ashley Irizarry FIN 370 Jan. 27th, 2014 Tarak Patel 2 Caledonia Products Integrative Problem 1. Caledonia should focus on project free cash flows because it is able to measure the company’s cash flows minus its capital expenditures. This can help a company determine the cash it is able to generate and see what cash is available to use for projects and expansion, pay dividends, or more. Looking at the company’s accounting profits will show the company’s earnings, but the cash flows will show the company’s overall financial health. The biggest reason to look at free cash flows opposed to projects accounting profits is that it will give the company the most accurate and valuable information for undergoing a new project. 2. Incremental Cash Flows (Year 1-5) Year 1: (Revenue: $21,000,000) – (Cost per Unit: $12,600,000) - ( Fixed Costs: $200,000) (Depreciation: $1,580,000) – (Taxes: $2,250,800) + (Depreciation: $1,5800) = $5,949,200 Year 2: (36,000,000) – (21,600,000) – ($200,000) – (1,580,000) – (4,290,800) + (1,580,000) = $9,909,200 Year 3: (42,000,000) – (25,200,000) – (200,000) – (1,580,000) – (5,106,800) + (1,580,000) = $11,493,200 Year 4: (24,000,000) – (14,400,000) – (200,000) – (1,580,000) – (2,658,800) + (1,580,000) = $6,741,200 Year 5: (15,600,000) – (10,800,000) – (200,000) – (1,580,000) – (1,026,800) + (1,580,000) = $3,573,200 The cash flows differ...
Words: 1114 - Pages: 5
...Caledonia Products Integrative Problem FIN/370 August 19, 2012 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? It is important that Caledonia Company should focus on the free cash flows instead of the accounting profits. With the free cash flows that the company receives they can reinvest. To accurately analyze the timing of the benefit or cost we can examine the cash flows. The only cash flows that the company should be interested in are the after-tax basis because these are the flows that are available to shareholders. When we look at the company as a whole, that shows us how important the incremental cash flow is and that interests the company. These incremental cash flows are the marginal benefits from the project and since the firm accepts the project they are the increased value to the firm. 2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings? Incremental Cash Flows for Caledonia years 1 to 5 1YR 2YR 3YR 4YR 5YR 21,000,000 36,000,000 42,000,000 24,000,000 15,600,000 Project Revenue 200,000 200,000 200,000 200,000 200,000 Minus fixed expenses 12,600,000 21,600,000 25,200,000 14,400,000 10,800,000 Minus variable expenses 8,200,000 14,200,000 16,600,000 9,400,000 4,600,000 Equals gross...
Words: 809 - Pages: 4
...Caledonia Products Integrative Problems Team A March 22, 2012 FIN/370 Kimberly Corbin University of Phoenix Loop Campus Caledonia Products Integrative Problems 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? a. Caledonia should focus on project free cash flow rather than accounting profits because free cash flow is what the company will receive that can be reinvested into the company. Thoroughly analyzing the free cash flow will help Caledonia determine the actual benefit and/or cost involved in the project. The company should focus primarily on the incremental cash flow because this holds a marginal benefit from the project. Depreciation is an expense meaning the greater the depreciation the greater the expense; therefore, if Caledonia looked at the project from the accounting profits, the profit will be much lower than that of the free cash flow. 2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings? b. The incremental cash flows for the projects in years 1 through 5 show $4,460,000 increase from the first to the second year, which is roughly about 53%. Year two through year three showed a %23 increase however year three through five respectively decrease %28 and %43 which as was expected to occur. 3. What is the project’s initial...
Words: 554 - Pages: 3
...Caledonia Products Integrative Problem Fin/370 January 30, 2012 Tony Moses Caledonia Products Integrative Problem 1.) Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? * Caledonia should focus on free cash flow rather than accounting profits because the free cash flow is what the organization receives which can then be reinvested. Through thoroughly analyzing the free cash flow, Caledonia would be able to determine the actual benefit or the cost involved. The organization should primarily focus on the incremental cash flow because the incremental cash flow holds a marginal benefit from the project. Depreciation is considered to be an expense item which means that the greater the depreciation, the larger the expense will be to the organization. Therefore, if Caledonia was looking at the project from an accounting profit view, the profit would be much lower than that of the free cash flow. 2.) What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings? In business finance there are a number of different cash flows. Caledonia will use the following incremental cash flows for this project in years 1 through 5: * Net initial investment outlay: The is outlay is comprised of cash expenditures, changes in net working capital, net cash flow from the sale of existing or...
Words: 855 - Pages: 4
...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 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 it will add enough value on its own. If you look at just the accounting profits, it might indicate that the company will be “more” profitable. However, that does not show how much the new project contributes on its own. Question 2 Incremental Cash Flows Years 1-5 | YEAR 1 | YEAR 2 | YEAR 3 | YEAR 4 | YEAR 5 | Project Revenues (sales price/unit * # units) | 21,000,000 | 36,000,000 | 42,000,000 | 24,000,000 | 15,600,000 | Cost of Goods Sold ($180/unit) | 12,600,000 | 21,600,000 | 25,200,000 | 14,400,000 | 10,800,000 | Gross Profit | $8,400,000 | $14,400,000 | $16,800,000 | $9,600,000 | $4,800,000 | Cash operating expenses | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | Depreciation ($7.9M/5) | 1,580,000 | 1,580,000 | 1,580,000 | 1...
Words: 968 - Pages: 4
...Caledonia Products Integrative Problem Adam Pugh, Estee Vargas-Nichols, Jenny Clark University of Phoenix FIN 370 Cassandra Ryder April 26, 2012 Caledonia Products Integrative Problem When companies are determining whether an investment must be undertaken, they decide if the investment will add to or detract from the value of the firm. There are several determining factors in evaluating an investment. These include project free cash flow versus accounting profits, incremental cash flows, net present value, and internal rate of return. Caledonia Products is deciding whether to undertake a new investment project. The firm must determine the cash flows for the life of the project, calculate the net present value and the internal rate of return, and decide whether the project is a sound investment. Caledonia must focus on free cash flow somewhat than accounting earnings because the free cash flow profits the society obtains, which can invested. Through examining the free cash flow, Caledonia would be competent to decide the definite advantage or the cost complicated. The association mainly should focus on the incremental cash flow since the incremental cash flow grips a peripheral advantage from the development. Decrease is measured to be expenditure item that means that the superior the devaluation, the superior the expenditure motivation be to the association. Consequently, if Caledonia perceived at the development from an office profit view, the profit would be much...
Words: 1255 - Pages: 6
...Caledonia Products Learning team C 03/10/14 Caledonia Products Integrative Problem Factors Caledonia must consider if it were to lease versus buying One of the very first factors that must be taken into consideration, would be in a case of leasing is regarding the reduction of out-of-pocket cost and its associated advantages. However, Caledonia must also understand that leasing will not give them complete ownership of the product until and unless lease is fully paid. Another factor that should be considered is regarding stability and consistency of cash flow needed to pay leases on a regular basis. In addition the worth and quantity of the products produced by the company is another factor of significant importance if opting for lease. Caledonia should make sure that the product has enough value and worth to keep their cash flow steady and progressing in the future. Caledonia, in worst case scenario should also have back up plans and strategies to overcome the difficulties and making sure that the lease is being paid consistently. On the other hand, buying is a simpler option that gives Caledonia complete authority to own the product. In this way Caledonia will have complete control over pricing, positioning, production, and preparation of the product without any complicated threats as in case of lease. Project free cash flows as opposed to the accounting profits earned Caledonia...
Words: 441 - Pages: 2
...Caledonia Products Integrative Problem Learning Team “C” Justin Griffin, Charles Ammah, Constance Allen, Edward Mason, and Mark Dawson FIN/370 April 25, 2013 Professor Bruce Huang Caledonia Products Integrative Problem Learning team C is tasked to prepare a response to the Caledonia Mini-Case located in chapter 12 of his and her readings. The team is to formulate answers to questions one through seven and describe factors Caledonia must consider if it were to lease versus buying. Here is the team’s response to the mini case. 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? Caledonia should focus on the project free cash flows instead the accounting profits received from the project because of the free or tax free money the company will receive by analyzing whether to handle the project. The incremental cash flow is the cash flow that Caledonia has interest in which projects marginal benefits that increase value within the company. 2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings? The incremental cash flows for the project in years one through five changes in net working capital is: The Net Operating Cash Flow - revenue net of expenses and liabilities for the specific period ▪ Net Initial Investment...
Words: 1335 - Pages: 6
...Caledonia Products Integrative Problem 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? Free cash flows are being focused on because it the amount that Caledonia will receive and they will be able to reinvest that amount. Caledonia should analyze the free cash flow so that they are able to see the real amount of value or what the cost may be. The marginal value from the project would be in the incremental cash flow. The earnings would be much less if they were looking at it through the accounting profits. It would be less because of the depreciation would be considered an expense causing a larger expense for Caledonia. Describe factors Caledonia must consider if it were to lease versus buy First Caledonia must figure out if they will have enough cash flow to pay the bill each month. Leasing would give Caledonia the benefit of decreasing costs. The down side of leasing would mean that Caledonia will not be out of the lease until it has been paid off and the company who leased the property will be the owners until that is completed. Buying property means that the item is usually in better condition, better value, and they will own it. Prices are often better when buying than with leasing. Tax expenses may be a downside of owning the property. 2. Incremental Cash Flow Year1 Year2 Year3 Year4...
Words: 632 - Pages: 3
...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...
Words: 415 - Pages: 2
...Caledonia Products Integrative Problem Cathi Stark, Jamie Prettyman, Sylvia Mendoza, and Gregory A. Osborn Jr. FIN/370 May 19, 2014 Christine Gordon The Expansion of Riordan Manufacturing Riordan Manufacturing has been in business for over 30 years. The company first opened their doors in 1991 as a research and development company. Over the last 30 years it has acquired a fan manufacturing company and a plastic bottle manufacturing plant. The company also made a big leap when it decided to move part of the company to China in 2000. It has been a while since the company has made any moves, and they have decided to expand the company once again. Riordan can expand the business in one of three ways: an IPO, acquire another organization, or merge with another organization. Strengths of Expansion Options Riordan must decide how to continue building their company. The first choice is an Initial Public Offering (IPO). This is “… basically the first time a company decides to sell stock to the public” (Marquit, 2012, Para. 2). This is a good idea because it allows the company to gain funds without the commitment of paying interest on a loan. The second option Riordan has is to acquire another. Because of its successful experience with acquisitions in the past, Riordan knows how to proceed. Purchasing another company Riordan can expand the product base while absorbing the competition. The final option is to merge with another company. This choice allows Riordan the ability...
Words: 1244 - Pages: 5
...62118 0/nm 1/n1 2/nm 3/nm 4/nm 5/nm 6/nm 7/nm 8/nm 9/nm 1990s 0th/pt 1st/p 1th/tc 2nd/p 2th/tc 3rd/p 3th/tc 4th/pt 5th/pt 6th/pt 7th/pt 8th/pt 9th/pt 0s/pt a A AA AAA Aachen/M aardvark/SM Aaren/M Aarhus/M Aarika/M Aaron/M AB aback abacus/SM abaft Abagael/M Abagail/M abalone/SM abandoner/M abandon/LGDRS abandonment/SM abase/LGDSR abasement/S abaser/M abashed/UY abashment/MS abash/SDLG abate/DSRLG abated/U abatement/MS abater/M abattoir/SM Abba/M Abbe/M abbé/S abbess/SM Abbey/M abbey/MS Abbie/M Abbi/M Abbot/M abbot/MS Abbott/M abbr abbrev abbreviated/UA abbreviates/A abbreviate/XDSNG abbreviating/A abbreviation/M Abbye/M Abby/M ABC/M Abdel/M abdicate/NGDSX abdication/M abdomen/SM abdominal/YS abduct/DGS abduction/SM abductor/SM Abdul/M ab/DY abeam Abelard/M Abel/M Abelson/M Abe/M Aberdeen/M Abernathy/M aberrant/YS aberrational aberration/SM abet/S abetted abetting abettor/SM Abeu/M abeyance/MS abeyant Abey/M abhorred abhorrence/MS abhorrent/Y abhorrer/M abhorring abhor/S abidance/MS abide/JGSR abider/M abiding/Y Abidjan/M Abie/M Abigael/M Abigail/M Abigale/M Abilene/M ability/IMES abjection/MS abjectness/SM abject/SGPDY abjuration/SM abjuratory abjurer/M abjure/ZGSRD ablate/VGNSDX ablation/M ablative/SY ablaze abler/E ables/E ablest able/U abloom ablution/MS Ab/M ABM/S abnegate/NGSDX abnegation/M Abner/M abnormality/SM abnormal/SY aboard ...
Words: 113589 - Pages: 455
