Celedonia Products
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Celedonia Products
Celedonia Products
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 project free cash flows besides accounting profits when analyzing whether to undertake the project because the cash flows will accurately analyze the timing of the benefit and cost. Cash flows will show the amount of available cash for distribution to the creditors for the money loaned to them for the project. When focusing on the free cash flows Caledonia will be able to use the income to reinvest in the company.
2. What are the incremental cash flows for the project in years1 through 5 and how do these cash flows differ from accounting profits or earnings?
Incremental cash flow is the change in a firms cash flows that is a direct effect a particular project. To determine the incremental cash flow Caldedonia must take the firms cash flows with the project and subtract that from the firms cash flows without the project. There are other aspects that Caledonia will need to analyze; for years one through five to determine if they should go through with this project. One of which includes an analysis of the projects initial outlay.
3. What is the projects initial outlay?
The initial outlay or net investment for this project is $8,000,000.
4. Sketch out a cash flow diagram for this project.
5. What is the projects net present value?
Units
Revenues
Cost of Goods
Annual fixed cost
depreciation
$70,000
$21,000,000
$12,600,000
$200,000
1600000
$120,000
$36,000,000
$21,600,000
$200,000
1600000
$140,000
$42,000,000
$25,200,000
$200,000
1600000
$80,000
$24,000,000
$14,400,000
$200,000
1600000
$60,000
$15,600,000
$10,800,000
$200,000
1600000
WC adj
Net cash flow
6600000
2244000
4356000
5956000
2000000
3956000
12600000
4284000
8316000
9916000
1500000
8416000
15000000
5100000
9900000
11500000
600000
10900000
7800000
2652000
5148000
6748000
-1800000
8548000
3000000
1020000
1980000
3580000
-2200000
5780000
6. What is its internal rate of return?
As the NPV is positive and IRR is more than cost of capital, therefore the project should be accepted.
7. Should the project be accepted? Why or why not?
We believe this project should be accepted, because the IRR is larger than the capital cost.