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Caledonia Projects

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Caledonia Products
March 24, 2013
BUS 401 Principles of Finance

Caledonia Products
Caledonia products is a company in which wants to foresee if the company should be invested into and if it has potential to invest. As we focus on free cash flows other then accounting profits because there are flows in which the firm receives and can reinvest. By only examining cash flows which is, “the amount of cash available from operation after the firm pays for the investment it has made in operating working capital and fixed assets. This cash is available to distribute to the firm’s creditors and owners.”( Keown, A., Martin, J., & Petty, J. (2011). Foundations of finance (7th ed.). We are only interested in these cash flows on after tax basis only as these are the flows which are available to the shareholder.
Second, it is only the incremental cash flows which interest the company by looking at the project from the point of the company as a whole; the incremental cash flows are the marginal benefits from the project and are the increased value to the firm of accepting the project. Depreciation is not a cash flow term; it does affect the level of the differential cash flows over the project’s life because of its effect on taxes. Depreciation which is an express item and the more depreciation incurred, the larger are expenses. The accounting profits become lower and in turn, so do taxes which are cash flow item.
When evaluating the capital budgeting proposal, the sunk costs are ignored. The company is only interested in only the incremental after tax cash flows, or free cash flows, to the company as a whole. Depending on the decision made on the investment at hand, the sunk costs will have already had occurred, which means they are not incremental cash flows but they are irrelevant. First, there is a total project risk also called project standing alone risk which is

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