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Caledonia Products

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Caledonia Products Integrative Problems
Team A
March 22, 2012
FIN/370
Kimberly Corbin
University of Phoenix
Loop Campus

Caledonia Products Integrative Problems

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? a. Caledonia should focus on project free cash flow rather than accounting profits because free cash flow is what the company will receive that can be reinvested into the company. Thoroughly analyzing the free cash flow will help Caledonia determine the actual benefit and/or cost involved in the project. The company should focus primarily on the incremental cash flow because this holds a marginal benefit from the project. Depreciation is an expense meaning the greater the depreciation the greater the expense; therefore, if Caledonia looked at the project from the accounting profits, the profit will be much lower than that of the free cash flow. 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? b. The incremental cash flows for the projects in years 1 through 5 show $4,460,000 increase from the first to the second year, which is roughly about 53%. Year two through year three showed a %23 increase however year three through five respectively decrease %28 and %43 which as was expected to occur. 3. What is the project’s initial outlay? c. The project’s initial outlay consists of the following components: * Plant and Equipment $7,900,000 * Shipping and installation $ 100,000 * Initial working capital $ 100,000 * Increase in new working capital , year 1 $2,100,000 *Total initial outlay $10,200,000 4. Did not have to complete this question. 5....

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