Calnedonia Project - Fin/370 Copy of Caledonia Products Mini Case (1) - 20874

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Calnedonia Project - Fin/370 Copy of Caledonia Products Mini Case (1)

Prepare a response to the Caledonia Products Mini-Case located near the end of Ch. 12 in Financial Management.


·         Formulate answers to questions 1 through 7

·         Describe factors Caledonia must consider if it were to lease versus buying. Your response to this portion of the assignment should be no more than 400 words.


Post your assignment as a team posting to the Assignments tab.


Be sure to properly cite and reference the sources of your financial



Calculating Free Cash Flow and Project Valuation


Its been two 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 capital-budgeting process. The memorandum you received outlining your assignment follows:


To: The Assistant Financial Analyst

From: Mr. V. Morrison, CEO, Caledonia Products

Re: Cash Flow Analysis and Capital Rationing


            We are considering the introduction of a new product. Currently we are in the 34% tax bracket with at 15% discount rate. This project is expected to last five years and then, because this is somewhat of a fad project, it will 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 1-4 and

                                                                        $260/unit in year 5

            Variable cost per unit:                            $180/unit

            Annual fixed Costs:                               $200,000 per year


            Working capital requiremtnes: there will be an initial working capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10% 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.

            Depreciation Method: Straight-line over 5 years assuming the plant and equipment have no salvage value after 5 years.



  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?


  1. Wat are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differe from accounting profits or earnings?


  1. What is the projects initial outlay?


  1. Sketch out a cash flow diagram for this project


  1. What is the project’s net present value?


  1. What is its internal rate of return?


  1. Should the project be accepted? Why or why not?



Solution Description

Marginal tax rate34.00%

Discount rate15.00%

Calnedonia Project - Fin370 Copy of Caledonia Products Mini Case.xls
Calnedonia Proj...