FIN370 WEEK 4 CALEDONIA PRODUCTS PAPER (***** 100% Correct Calculation in Excel Spreadsheet and word File *****)

WEEK 4 CALEDONIA PRODUCTS PAPER

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?

2.      What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?

3.      What is the project’s initial outlay?

4.      Sketch out a cash flow diagram for this project

5.      What is the project’s net present value?

6.      What is its internal rate or return?

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

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

9.      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?

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

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

FIN 370 WEEK 4 CALEDONIA PROJECT PAPER

FIN370 WEEK 4 CALEDONIA PROJECT PAPER

FIN/370 WEEK 4 CALEDONIA PROJECT PAPER

Re: Cash Flow Analysis and Capital Rationing

We are considering the introduction of a new product. Currently we are in the 34% tax bracket with a 15% discount rate. This project is expected to last five years and then, because this is somewhat of a fad project, it will be terminated. The following information describes the new project:

Cost of new plant and equipment:      $ 7,900,000

Shipping and installation costs:          $ 100,000

Unit sales:      

Year    Units Sold

1          70,000

2          120,000

3          140,000

4          80,000

5          60,000

Sales price per unit:     $300/unit in years 1–4 and $260/unit in year 5.

Variable cost per unit: $180/unit

Annual fixed costs:     $200,000 per year

Working capital requirements: There will be an initial working capital requirement of $100,000 just to get production started.. 

FIN 370 WEEK 4 Caledonia Project LEARNING TEAM ASSIGNMENT

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