Caledonia Products

Intro

Prentice Hall

Caledonia Products is deciding on a different business proposal that will refer to the results made by a financial specialist who is working for the capital budget department at Caledonia Products. The organizations have asked Team A to determine the possible risks involved in future contracts and recognize possibilities in how to organize a free cash flow investment, and calculate the project to limit the net present value of the business proposal. Caledonia Products financial analyst will take into consideration that this is the team's first assignments working with risk analyzes, and to explain the details. The organization analysis will concentrate on an estimate of cash flows; free cash flows; missions' early expense, cash flow diagram, present-day value, and an interest rate of return for the last five years. The study will also question if the investment will have a shortage to the business's making over the length of the project. One matter that Caledonia must consider is deciding if they should lease or purchase which is the protection that comes along with owning an asset against leasing one. With Caledonia having the equipment, the business can feel more protected than with the leasing. Another concern that Caledonia must study is the maintenance with owning a business versus leasing one. Caledonia will have to repair its own maintenance problems, while with leased properties the owner is responsible.

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?

Team A believes that Caledonia must pay attention to the development's free cash flow and not so much on the office earnings since the indications that show the office earnings will be received due to the positive cash flow to the shareholders. One of the cash flows that a business has regarding interest is the incremental cash flows (Titman, Martin, Keown, 2011). This happens because the cash flows are the low profits from the development; and increases value from the project. With some investment, there is the expectation that there will be an increase to the firm's cash flow. Free cash flow is the overall cash offered to creditors who have financed