Focus of the Final Project
Read the Mini Case from the end of Chapter 11 about Caledonia Products and thoroughly respond to Parts a to n at the end of the case. Your paper should answer all of the questions of the Mini Case (without repeating the questions), as a concise management statement in four to six pages. Explain the reasoning behind your answers and support your answers with examples from the text and other research. Where appropriate, properly cite the text or any other source. For questions requiring calculations, use formulas in Excel to calculate the ratios and format the cells to insert a comma if there are more than three numbers. Submit your work as a separate Excel document, in addition to your analysis. Round dollar amounts to the nearest whole number and percentages to two decimal places as a percentage. Clearly label your analysis and the sum of your conclusions for all parts of the case.
Writing the Final Project
The Final Project:
Mini Case
It’s been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given your lack of tenure at Caledonia, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at judging your understanding of the capitalbudgeting process. The memorandum you received outlining your assignment follows:
We are considering the introduction of a new product. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the new project:
Cost of new plant and equipment 
$ 7,900,000 

Shipping and installation costs 
$ 100,000 

Unit sales 


YEAR 
UNITS SOLD 




1 
70,000 

2 
120,000 

3 
140,000 

4 
80,000 

5 
60,000 
Sales price per unit 
$300/unit in years 1 through 4, $260/unit in year 5 

Variable cost per unit 
$180/unit 

Annual fixed costs 
$200,000 per year in years 1–5 

Workingcapital requirements 
There will be an initial workingcapital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. 

The depreciation method 
Use the simplified straightline method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years. 
a. Should Caledonia focus on cash flows or accounting profits in making its capitalbudgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits?
A+++++++