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Caledonia Products

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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?

They need the free cash flow in order to stay in business. Caledonia needs to focus on the free cash flow amount as they can reinvest this money once they receive it back. The free cash flow gives Caledonia a sense of what the amount may be and lets them see the value at a real dollar amount. They need the free cash flow in order to stay in business.

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?

Caledonia does not show any type of depreciation within the company’s free cash flow. Looking at the different years over the lifetime of the project will have an effect on the project as well as the taxes. From the first to the third year there was a large increase from year to year. When the fourth and fifth year came around the company had a major decrease within both years.

3. What is the project’s initial outlay?

The company’s initial project outlay was $7,900,000 would be the cost of a new plant and equipment, with $100,000 being used for shipping and installation cost. With $100,000 being used for working capital to get the production started.

4. What is the projects net present value? The project net present value is $16,731,095.66

5. What is the projects internal rate of return? 77.02%

6. Should the project be accepted? Why or Why not? Yes the project should be accepted because the NPV is positive and project will add value to the organization. The organization will receive a 77.02% return on its initial

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