# Fin/370 Caledonia Products Essay examples

786 Words Mar 2nd, 2013 4 Pages
Caledonia Products Integrative Problem
January 13, 2013 Caledonia Products Integrative Problem The following observation will describe the decisions made by a financial analyst who is working for the capital budget department at Caledonia Products. The organization has asked Team B to evaluate the potential risk involved in an upcoming transaction and identify several options in how to proceed. Because this is the team’s first assignments dealing with risk analyzes the team has been ask to further explain the details. The organization analysis will focus on free cash flows, projection of cash flows, projects initial outlay, cash flow diagram, net present value, internal rate of return, and if the
Year-1:\$2,100,000
Year-2:\$3,600,000
Year-3:\$4,200,000
Year-4:\$2,400,000
Year-5:\$1,560,000
Initial outlay
This project’s initial outlay includes the necessary capital needed to purchase fixed assets and ensure they are in operating order to start the project.

Cost of new plant and equipment: 7,900,000
Shipping and installation cost: 100,000
Initial working capital required to start the production: 100,000 8,100,000

The initial outlay for this project is \$8,100,000

Cash flow diagram
\$3,956,000 \$8,416,000 \$10,900,000 \$8,548,000 \$5,980,400

(\$8,100,000)

Net Present Value and Internal Rate of Return
Unit Price x units sold
1:\$21,000
2:\$36,000
3:\$42,000
4:\$24,000
5:\$15,600
Therefore, NPV = \$94,575.83
NPV Values for Years
1: \$18,260.90
2: \$27,221.17
3: \$27,615.68
4: \$13,722.40
5: \$7,755.98
The Internal Rate of Return (IRR) = 12.61%
Project Conclusion Deciding on whether to follow through with a project is done by evaluating either the internal rate of return or net present value. According to Investopedia, “All other things being equal, using internal rate of return (IRR) and net present value (NPV) measurements to evaluate