Caledonia Problem

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Caledonia Products Integrative Problem
July 31, 2013
Yvette “Betsy” Stewart

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
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Over a five year period the total cash inflow is $118,272 with a net value of $18,272 for the project. Net present value = $118,272 - $100,000 = $18,272
IRR is 18.03%.

7. Should the project be accepted? Why or why not? The project should be accepted since the net present value being positive. This means that the project will bring in some kind of value and money to the company, and also that it can have a progressive cash inflow throughout the time of the project. The company must not take on this project except it has an opportunity cost that displays that the company would take on an additional project that has a better NPV and value to the company.

• Describe the factors Caledonia must consider if it were to lease versus buying. Leasing versus buying can be an remarkable choice for Caledonia but the choice of leasing comes with issues. One of the most vital factors Caledonia will need to reflect over is how lengthy the estimated life of the plant and equipment is. The company stated that the task is likely to only be a vogue with a projected lifecycle of five years or so Caledonia will need to take that into contemplation. The next discussion must be whether the plant and equipment might be used for upcoming projects? In adding, will the technology change so abundant in the next five years that the equipment develops outdated and will essential be upgraded
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