...Caledonia Products K.C. BUS 401 Principles of Finance Prof. Andrew McIntyre March 19, 2012 Caledonia Products Businesses are started in many ways for many reasons. Many companies begin as very small businesses while others are inherited as major corporations. Most businesses have shareholders who invest in different business ventures in order to receive a profit. Whether the profit is in the form of dividends or something else, all shareholders will try to ensure to success of the company. No matter what type of investments the company receives, there are many decisions and risks that a company must consider. Caledonia should focus on free cash flows because the firm actually receives these cash flows and can also reinvest them. These cash flows are beneficial on an after tax basis. The company should be interested in incremental cash flows as a whole. The acceptance of the project results in increased value of the firm while the cash flows are the marginal benefit. Depreciation is an expense which affects cash flow indirectly. Cash flows are affected by depreciation throughout the life of a project through income taxes. The more depreciation is incurred, the larger the expense. Higher depreciation expenses can cause a lower taxable income which creates changes in cash outflow. Sunk costs are normally irrelevant especially when sunk costs are already occurred. Being that the company should...
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...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...
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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...
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...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...
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...Caledonia Products Integrative Problem FIN/370 February 11, 2014 Caledonia Products Integrative Problem It has been two months since team B has been hired as an assistant financial analyst at Caledonia Products; the company has been pleased with our work. They are still a little hesitant to give us work without supervision. Caledonia Products Company is introducing a new product, we have been given the assignment that involves both the calculation of the cash flows associated with a new investment and the evaluation of several mutually exclusive projects. The company is currently in the 34% tax bracket with a 15% discount rate because this project is considered a fad project it will only last five years then it will be terminated. This paper will focus on free cash flows, projection of cash flows during years 1-5, projects initial outlay, cash flow diagram, net present value, internal rate of return, and if the project should be accepted. Free Cash Flow Versus Profits Earned After reviewing the numbers for project Caledonia Products, it shows that the best route that Caledonia Products Company should focus on is free cash flows versus to the accounting profits that was obtained by the project itself. The numbers show that the accounting profits should be earned by this current project due to there is a positive rather than negative cash flow to the company shareholders. In this case, Caledonia’s free cash flow is its total cash available to the creditors...
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...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...
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...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...
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...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...
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...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+...
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...Caledonia Products Integrative Program FIN 370 - Finance for Business |Operating Cash Flow |Year One |Year Two |Year Three |Year Four |Year Five | |Project Revenue |$21,000,000 |$36,000,000 |$42,000,000 |$24,000,000 |$15,600,000 | |Cost of Goods Sold |($12,600,000) |($21,600,000) |($25,200,000) |($14,400,000) |($10,800,000) | |Fixed Costs |($200,000) |($200,000) |($200,000) |($200,000) |($200,000) | |Gross Profits |$8,200,000 |$14,200,000 |$16,600,000 |$9,400,000 |$4,600,000 | | | | | | | | |Depreciation |($1,600,000) |($1,600,000) |($1,600,000) |($1,600,000) |($1,600,000) | |Net Operating Income |$6,600,000 |$12,600,000 |$15,000,000 |$7,800,000 |$3,000,000 | | ...
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...VALE Briefly explain its profile (e.g. activity, business model, history, who are the owners). Vale is a Brazilian multinational specialised in mining and metal operations. It is the third largest mining company in the world, with over 85,000 employees and a revenue of $44 billion in 2013. The ownership is currently split into 3 golden-shares owned by the Brazilian Government and the rest is owned by pension funds. Founded in 1942 by the Brazilian Federal Government as Companhia Vale do Rio Doce (CVRD), it soon became the biggest company responsible for the country’s iron ore exports (80% in 1949). In 1982, Vale diversified its activity portfolio, but also expanding geographically. The firm was privatised in 1997, and as a result, decided to focus mainly on mining extraction as a primary business, only keeping logistics and energy as a way to reduce costs and risks of their main activity. From 2000 to 2007, Vale entered a phase of market consolidation, resulting in the company owning 85% of the iron ore production in Brazil. At the same time, the company diversified internationally to increase the participation of non-ferrous metals on total revenues – for example, a nickel-producing company in Canada, or coal-mining companies in Australia or China. Explain the company’s strategy, drawing from the data you found plus your assumptions. Vale’s vision is to be the number one global natural resources firm. In order to achieve its vision, Vale has a strategy of expansion: ...
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...Retail Advertising and Marketing Association Gen/200 Retail Advertising and Marketing Association "Consumers know precisely what's wrong with advertising. Be it TV or print or whatever, they know that advertising is never creative enough ... never as witty, inspiring, sophisticated, entertaining and downright likable as they would like it to be” (Phil Dussonberry, former BBDO advertising executive). In the world of retail things are ever changing there is a constant need for new advertising or marketing to grab the consumers attention. Without these tools a retailers profits can quickly dwindle leaving them in the dust. One great tool for retailers is the Retail Advertising and Marketing Association(RAMA). This paper will explain what RAMA is, how it can increase my professional knowledge and abilities, and how perfecting my knowledge and abilities can affect my career success. The Retail Advertising & Marketing Association (RAMA) is a trade association of retail marketing and advertising professionals, plus their counterparts on the agency, media and service-provider sides of the business. RAMA is a division of the National Retail Federation, the world’s largest retail trade association (National Retail Federation, 2011). RAMA also is the producer of the annual Racie Awards Competition, the industry’s most prestigious creative contest for retail broadcast, web and print advertising (National Retail Federation, 2011). RAMA is an innovative association that connects retailers...
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...the strategic life cycle challenges for Paramount's current products as well as for Clean Edge? Changes in Non-Disposable Razor Category: The non-disposable razor category has seen changes in the recent years. A 5% growth per year from 2007 to 2010, attributed to innovations and product introductions, has to be the biggest change that the category has seen. Advertising expenditures increased dramatically for several non-disposable razor companies over the last couple of years because of the need to promote new benefits from advances in razor technologies. Changes in retail channel distribution have also been noted in the category. Male-grooming products seemed to be a bright spot in the industry from 2007 to 2010 and the segment saw more growth because shaving became more than just shaving – it started to include body spray, shower gel, etc. Channel distribution for the razor category has become increasingly important, with the recent re-introduction of Old Spice; there has been quite the demand for male-grooming products. Competitive Position: Paramount has established itself as a global consumer products giant with over $13 billion in worldwide sales and $7 billion in gross profits for 2009 since its entry into the market in 1962. Paramount established itself as unit-volume leader in 2009 based on non-disposable razor sales. The non-disposable razor category market is entering a new phase with technology products and new competitors entering the market, posing a threat to...
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... How Our Marketing Research Lead To A Position So Compelling That Consumers Chose Our Client’s Product Over A Larger, Wealthier Competitor CASE STUDY #64 “We are not as broadly distributed as our competition. What can we say - other than „free‟ that will convince consumers to inconvenience themselves and leave (or “walk”) from a retailer that doesn‟t carry our products to a retailer that does?” POINT OF VIEW We never lost sight of the mission: GET THE CUSTOMERS TO PREFER US, EVEN THOUGH WE AREN’T AS WELL DISTRIBUTED OR WEALTHY. The actionable marketing research we conducted enabled us to leap over our competitor’s entrenched, better-distributed brand, craft a message that resonated with the audience, and build preference for our client’s product. Win / Win for everybody except the competition. Situation The client had a great product, but was being outspent by the competition, which also had broader distribution. Our challenge was to craft a concept for the product so unique and compelling, it would encourage consumers to “walk” from a store they typically shop at that carries only the competitor’s product and go to a store that carries the client’s product. Approach Quantitative, qualitative and ethnographic research enabled us to uncover aspects of the client’s product that made it stand out over the competition’s. Then we developed a unique marketing research measurement that tracked awareness, interest, and the actual shopping trip. Result ...
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...potential customers. You have to figure out who your going to sell your product to and how to reach these individuals. The third challenge I see with setting up a business is coming up with the capital to start the business. It takes money to make money. Unless you have a nice savings account, you will probably have to get a business loan or find people who are willing to invest in your company. 2. Define what a “niche” product is. Give at least three examples of niche products. A niche product is something designed to appeal to specialized interests. Not for everyone, but a specific customer. Examples; speakers at the Bose store, Starbucks Coffee, a restaurant that sells Chinese food. 3. Explain why a niche company might have an advantage in a market. Would price necessarily be an advantage? Explain why or why not. A niche company has an advantage in the market because the customers are coming to the store specifically for a product that the company sells. If a woman walks into Victoria’s Secret, she’s shopping for women’s underclothes and she’s completely surrounded by women’s underclothes from the minute she walks into the store. Price might be an advantage if the company has a large enough surplus of the product, like Victoria‘s Secret. The product can be cheaper. But if the product is a specialty item the price might be higher. I think that the customer will be willing to pay more for a product at a niche...
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