Celedonia Products

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 firm's cash flows that is a direct effect a particular project. To determine the incremental cash flow Caldedonia must take the firm's cash flows with the project and subtract that from the firm's 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 project's 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 project's net present value?

Year Units Revenues Cost of Goods Annual fixed cost depreciation

1 $70,000 $21,000,000 $12,600,000 $200,000 1600000

2 $120,000 $36,000,000 $21,600,000 $200,000 1600000

3 $140,000 $42,000,000 $25,200,000 $200,000 1600000

4 $80,000 $24,000,000 $14,400,000 $200,000 1600000

5 $60,000 $15,600,000 $10,800,000 $200,000 1600000

EBT tax EAT CFAT 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.