'Caledonia Products\r'

'Caledonia Products Integrative Problem 1. Why should Caledonia way on find free cash die hards as opposed to the accounting earnings earned by the abide when analyzing whether to undertake the project? Free cash flows are being focused on because it the bar that Caledonia will receive and they will be open to reinvest that nitty-gritty. 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 bare(a) value from the project would be in the additive cash flow. The earnings would be much little if they were looking at it through the accounting profits.It would be less because of the depreciation would be con expressionred an expense make a larger expense for Caledonia. Describe factors Caledonia must(prenominal)iness consider if it were to lease versus buy First Caledonia must figure by if they will have overflowing cash flow to pay the bill from each one month. Leasing would give Caledonia the benefi t of decreasing costs. The down side of leasing would mean that Caledonia will non be out of the lease until it has been paid off and the company who undertake the property will be the owners until that is completed.Buying property nub that the item is usually in best(p) condition, give out 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 bullion Flow Year1 Year2 Year3 Year4 Year5 Operating Cash Flow 5,949,200 9,909,200 11,493,200 6,741,200 3,771,200 Each year results in despotic additive cash flow and the new project appears to be a profitable business option.Accounting profits represent the total cost of doing business. The difference would be that this company requires additional net working swell every year which is not reflected in the incremental costs. 3. initial Outlay Year 0 naked as a jaybird Product Cost of new plant and equipment$(7,900,000) tape drive and installation costs (100,000) Total costs$(8,000,000) Initial working capital $(100,000) Initial cash flow (8,100,000) 4. Free Cash FlowYear0 Year1 Year2 Year3 Year4 Year 5 travail 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) Gross 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) realize operational 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) CAP EX $(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 ? requisite rate of return. Or No. This project should not be accepted because the NPV < and the IRR < required rate of return.\r\n'