Caledonia Products Integrative Problem Essay

The following observation will describe the decisions made by a financial analyst who is working for the capital letter budget segment at Caledonia Products. The organization has directed Team B to prize the potential happen involved in an upcoming transaction and identify several options in how to proceed. Because this is the teams first assignments dealing with risk analyzes the team has been ask to further explain the details. The organization analysis will focus on free exchange prevails, deviseion of cash geological periods, take ins sign outlay, cash commingle diagram, net present value, internal rate of return, and if the view should be accepted.why focus on bear free cash liquefysTeam B believes that Caledonia should focus on the projects free cash flows and non the accounting ne devilrk. Evidence exists that the accounting profits will be get by the project because there is a positive cash flow to the shareholders. With any investment there is the expectati on that there will be an increase to the firms cash flow. Free cash flow is the agree cash available to creditors who have invested their monies to finance the project. Accounting profits includes costs such as depreciation, interest, and taxes to run a business therefore it should not affect free cash flows. The project free cash flows range from division zero to year five and illustrate how a good deal Caledonia Products will benefit if they choose to take on this project. toilion of project in years ane through fiveThere is annual working capital requirement of $100,000 to initiate the project. The incremental cash flows for the project in years one through five utters increase. For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. In year one free cash flow is $2,100,000 in year two $3,600,000, which means fist year increase of $1,500,000, and it is about 53% increase. In year two 23% increase and year three to cardinal decreases of 28%, and in year five free cash flow is $1,560,000, which means 43% decrease.Year-1$2,100,000Year-2$3,600,000Year-3$4,200,000Year-4$2,400,000Year-5$1,560,000Initial outlayThis projects initial outlay includes the necessary capital needed to purchase fixed assets and ensure they are in operating order to start the project.Cost of refreshing plant and equipment 7,900,000 Shipping and installation cost 100,000 Initial working capital required to start the production 100,000 8,100,000The initial outlay for this project is $8,100,000 bullion flow diagram$3,956,000$8,416,000$10,900,000$8,548,000$5,980,400($8,100,000)Net manifest Value and familiar enumerate of ReturnUnit Price x units sold1$21,0002$36,0003$42,0004$24,0005$15,600Therefore, NPV = $94,575.83NPV Values for Years1 $18,260.902 $27,221.173 $27,615.684 $13,722.405 $7,755.98The Internal Rate of Return (IRR) = 12.61%Project ConclusionDeciding on whether to follow through with a project is done by evaluating either the internal rate of return or net present value. According to Investopedia, All other things being equal, employ internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings (Investopedia, 2013). If comparing one project to another, the one with the higher rate or return would be the more kindly one. In this instance several projects were not compared, and the IRR is below the current fire rate, which makes the project not feasible. The problem with IRR, however, is that it does not take into account changing discount rates.As market conditions and other factors change, so does the IRR. Net Present Value (NPV) on the other hand, takes changing rates into account and is a mensural using very complex formula taking numerous factors into account for each stage of the project. If the Net Present Value is calculated to be above zero, or positive, it is considered to be feasible, and the project sh ould be accepted. Our calculations show the NPV in each year to be positive and believe that the project in this case should indeed be accepted.ReferencesInvestopedia US, A Division of ValueClick, Inc. . (2013). Internal Rate Of Return IRR. Retrieved from http//www.investopedia.com/terms/i/irr.aspaxzz2HtkRBF6q