Caledonia Products Integrative Problem

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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
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Net Present Value
The net present value (NPV) is used to evaluate the amount of wealth a certain project is expected to create (Titman, 2011). If the NPV comes out positive the organization should consider moving forward with it; however, if the outcome is negative the project should be rejected. When calculating the NPV the formula that is used is as follows:
NPV = Cash Flow for Year 0 + Cash Flow for Year 1 +…+ Cash Flow for Year ^n (1+Discount Rate)^1 (1+Discount Rate)^n
Caledonia Products is considering undertaking a new investment opportunity. There is an initial working capital requirement of $100,000, which will be required to get the project started. To calculate the NPV of the new investment one must first calculate the cash flow for each year. It is estimated the cash flow for the following years are: Year One $8,200,000 Year Two $14,200,000 Year Three $16,600,000 Year Four $9,400,000 Year Five $4,600,000

Once the cash flow has been calculated, the next part of the equation is to divide 1+discount rate ^n and add all figures together to reach the net present value (NPV). According to the figures the NPV of the proposed Caledonia project is $24,733,858.96. This is showing a positive NPV.
Internal Rate of Return The internal rate of return (IRR) is the rate of growth the organization is

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