Working-capital requirements

There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.

The depreciation method

Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years.

a.                        Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits?

b.            How does depreciation affect free cash flows?

c.                        How do sunk costs affect the determination of cash flows?

d.            What is the project’s initial outlay?

e.                        What are the differential cash flows over the project’s life?

f.             What is the terminal cash flow?

g.            Draw a cash flow diagram for this project.

h.            What is its net present value?

i.             What is its internal rate of return?

j.             Should the project be accepted? Why or why not?

k.            In capital budgeting, risk can be measured from three perspectives. What are those three measures of a project’s risk?

l.             According to the CAPM, which measurement of a project’s risk is relevant? What complications does reality introduce into the CAPM view of risk, and what does that mean for our view of the relevant measure of a project’s risk?

m.           Explain how simulation works. What is the value in using a simulation approach?

n.            What is sensitivity analysis and what is its purpose?

Keown, Arthur J.,  John H. Martin,  and John W. Petty. Foundations of Finance for Ashford University, 7th Edition.Pearson Learning Solutions.<vbk:9781256064961#outline(19.13)>.

Your Paper Must:

1. Answer all of the questions of the Mini Case in the form of a management statement.  Do not simply list the questions and answers.
2. Explain the reasoning behind your answers and support your answers with examples from the text and other research.
3. Include both a Word document for your written answers and an Excel document for your calculated solutions.
4. For questions requiring calculations, use formulas in Excel to calculate your solution.

Guidelines for Writing the Final Paper

• Word document must be four to six (4-6) double-spaced pages in length, exclusive of Appendix, References, Exhibits, etc.
• Formatted according to APA style as outlined in the approved APA style guide (including title page, in text citations and reference list).
• Must include an introductory paragraph with a succinct thesis statement.
• Must address the topic of the paper with critical thought.
• Must conclude with a restatement of the thesis and a conclusion paragraph.
• Must use at least two scholarly sources, one of which may be the textbook.