# Fin 370 Week 3 Team Assignment Essay

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FIN370 WK3 Solutions Guide: 1. We focus on free cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Also, we are only interested in these cash flows on an after tax basis as only those flows are available to the shareholder. In addition, it is only the incremental cash flows that interest us, because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project. 2. Although depreciation is not a cash flow item, it does affect the…show more content…
Cash flow diagram \$3,956,000 \$8,416,000 \$10,900,000 \$8,548,000 \$5,980,000 (\$8,100,000) 8. NPV = \$16,731,095.66 9. IRR = 77% 10. Yes. This project should be accepted because the NPV ≥ 0. and the IRR ≥ required rate of return. 11. a. NPVA = - \$195,000 = \$218,182 - \$195,000 = \$23,182 NPVB = - \$1,200,000 = \$1,500,000 - \$1,200,000 = \$300,000 b. PIA = = 1.1189 PIB = = 1.25 c. \$195,000 = \$240,000 [PVIFIRRA%,1 yr] 0.8125 = PVIFIRRA%,1 yr Thus, IRRA = 23% \$1,200,000 = \$1,650,000 [PVIFIRRB%,1 yr] 0.7273 = [PVIFIRRB%,1 yr] Thus, IRRB = 37.5% d. If there is no capital rationing, project B should be accepted because it has a larger net present value. If there is a capital constraint, the problem then focuses on what can be done with the additional \$1,005,000 freed up if project A is chosen. If Caledonia can earn more on project A, plus the project financed with the additional \$1,005,000, than it can on project B, then project A and the marginal project should be