Caledonia Products

Caledonia Products Integrative Problem 1. Why should Caledonia focus on project wanton cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? abandon cash flows ar universe focused on because it the amount that Caledonia provideing receive and they will be able to reinvest that amount. Caledonia should analyze the free cash flow so that they atomic number 18 able to see the real amount of value or what the bell 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 affected an disbursement 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 all(prenominal) month. Leasing would give Caledonia the benef it of decreasing cost. The down side of leasing would mean that Caledonia will not be out of the lease until it has been paid off and the family who leased the property will be the owners until that is completed.Buying property means that the peak 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 Year5 Operating Cash Flow 5,949,200 9,909,200 11,493,200 6,741,200 3,771,200 for each one year results in positive incremental cash flow and the unexampled project appears to be a profitable business option.Accounting profits exhibit the total cost of doing business. The difference would be that this company requires additional pass working capital every year which is not reflected in the incremental costs. 3. Initial Outlay Year 0 New Product appeal of new plant and equipment$(7,900,000) Shipping and installa tion costs (100,000) Total costs$(8,000,000) Initial working capital $(100,000) Initial cash flow (8,100,000) 4. take over Cash FlowYear0 Year1 Year2 Year3 Year4 Year 5 Project Revenues $21,000,000 $36,000,000 $42,000,000 $24,000,000 $15,600,000 Unit Costs (12,600,000) (21,600,000) (25,200,000) (14,400,000) (10,800,000) everlasting(a) Profit 8,400,000 14,400,000 16,800,000 9,600,000 4,800,000 Annual fixed costs (200,000) (200,000) (200,000) (200,000) (200,000) Depreciation (1,580,000) (1,580,000) (1,580,000) (1,580,000) (1,580,000) Net ope lay out income 6,620,000 12,620,000 15,020,000 7,820,000 3,320,000 Taxes (34%) (2,250,800) (4,290,800) (5,106,800) (2,658,800) (1,128,800) NOPAT 4,369,200 8,329,200 9,913,200 5,161,200 2,191,200 Depreciation 1,580,000 1,580,000 1,580,000 1,580,000 1,580,000 Operating cash flow 5,949,200 9,909,200 11,493,200 6,741,200 3,771,200Year0 Year1 Year2 Year3 Year4 Year5 Net Capital $(100,00) (2,100,000) (3,600,000) (4,200,000) (2,400,000) (1,560,000) CA PEX $(8,000,000) - - Free Cash Flow $(8,100,000) 3,849,200 6,309,200 7,293,200 4,341,200 2,211,200 5. 6. 7. Should the project be accepted? Why or why not? Yes. This project should be accepted because the NPV ? 0. and the IRR ? inevitable rate of return. Or No. This project should not be accepted because the NPV and the IRR required rate of return.