Caledonia Project

939 Words Feb 14th, 2014 4 Pages
Caledonia Project

Team A

James Kochiel, Erik Nutt, Lynnell Smothers, Derek Wright

January 21, 2014

John Dewey

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?

Caledonia should focus on cash flows, because free cash flows can be reinvested when received, unlike accounting profits which are shown when earned, and not at the time cash is received. The company should focus on incremental after-tax cash flows. This enables it to analyze the profits or losses after comparing cash flows with or without the project on an after tax basis.
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For Project A, at Year 0 the PV would remain $-100,000 since that is the initial investment. At Year 1, the Using the required rate of return of 11%, we first need to find the present value (PV). For Project A, at Year 0 the PV would remain $-100,000 since that is the initial investment. At Year 1, the PV would be $-28,828.80; Year 2, $-25,971.84; Year 3, $-23,398.08; Year 4, $-21,079.36; and at Year 5, $-18,990.40. The sum of the figures for Year 1 through Year 5 would give you the Present Value of Projected Cash Inflow, and once you add that number to the initial investment, the Net Present Value would be $18,268.48.

For Project B, at Year 0 the PV would remain $-100,000 since that is the initial investment. At Years 1-4, the PV would be $0 since the cash flow is $0. At Year 5, the PV would increase to $118,690. You would then add that number to the initial investment to find the NPV which would be $18,690. PV would be $-28,828.80; Year 2, $-25,971.84; Year 3, $-23,398.08; Year 4, $-21,079.36; and at Year 5, $-18,990.40. The sum of the figures for Year 1 through Year 5 would give you the Present Value of Projected Cash Inflow, and once you add that number to the initial investment, the Net Present Value would be $18,268.48.

For Project B, at Year 0 the PV would remain $-100,000 since that is the initial investment. At Years 1-4, the PV would be $0 since the cash flow is $0. At Year 5, the