Caledonia Products Calculating Free Cash Flow and Project Valuation It’s been two months since you took a position as an assistant financial analyst at Caledonia Products. Although your bosshas been pleased with your work, he is still a bit hesitant aboutunleashing you without supervision. Your next assignment involvesboth the calculation of the cash flows associated with anew investment under consideration and the evaluation of several mutually exclusive projects. Givenyour lack of tenure atCaledonia, you have been asked not only to provide a recommendation, butalso to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignmentfollows:To: The Assistant Financial AnalystFrom: Mr. V. Morrison, CEO, Caledonia ProductsRe: Cash Flow Analysis and Capital RationingWe are considering the introduction of a new product.Currently we are in the 34% tax bracket with a 15% discountrate. This project is expected to last five years and then,because this is somewhat of a fad project, it will beterminated. The following information describes the newproject:Cost of new plant and equipment: $ 7,900,000Shipping and installation costs: $ 100,000Unit sales: Year Units Sold year 1- 70,000year 2- 120,000year 3- 140,000year 4- 80,000year 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 initialworking capital requirement of $100,000 just to getproduction started. For each year, the total investment in networking capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital willincrease during years 1 through 3, then decrease in year 4.Finally, all working capital is liquidated at the termination of theproject at the end of year 5.Depreciation method: Straight-line over 5 yearsassuming the plant and equipment have no salvage valueafter 5 years. Question 1. What is the project’s initial outlay? 2. What the project’s net present value? Should be projected be accepted? Why or why not?

Caledonia Products Calculating Free Cash Flow and Project Valuation It’s been two months since you took a position as an assistant financial analyst at Caledonia Products. Although your bosshas been pleased with your work, he is still a bit hesitant aboutunleashing you without supervision. Your next assignment involvesboth the calculation of the cash flows associated with anew investment under consideration and the evaluation of several mutually exclusive projects. Givenyour lack of tenure atCaledonia, you have been asked not only to provide a recommendation, butalso to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignmentfollows:To: The Assistant Financial AnalystFrom: Mr. V. Morrison, CEO, Caledonia ProductsRe: Cash Flow Analysis and Capital RationingWe are considering the introduction of a new product.Currently we are in the 34% tax bracket with a 15% discountrate. This project is expected to last five years and then,because this is somewhat of a fad project, it will beterminated. The following information describes the newproject:Cost of new plant and equipment: $ 7,900,000Shipping and installation costs: $ 100,000Unit sales: Year Units Sold year 1- 70,000year 2- 120,000year 3- 140,000year 4- 80,000year 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 initialworking capital requirement of $100,000 just to getproduction started. For each year, the total investment in networking capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital willincrease during years 1 through 3, then decrease in year 4.Finally, all working capital is liquidated at the termination of theproject at the end of year 5.Depreciation method: Straight-line over 5 yearsassuming the plant and equipment have no salvage valueafter 5 years. Question 1. What is the project’s initial outlay? 2. What the project’s net present value? Should be projected be accepted? Why or why not?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 7TP: You begin a new job at Cabrera Medical Supplies. The company is considering a new accounting system,...

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Question

Caledonia Products

Calculating Free Cash Flow and Project Valuation

It’s been two months since you took a position as an assistant

financial analyst at Caledonia Products. Although your bosshas been pleased with your work, he is still a bit hesitant aboutunleashing you without supervision. Your next assignment involvesboth the calculation of the cash flows associated with anew investment under consideration and the evaluation of several mutually exclusive projects. Givenyour lack of tenure atCaledonia, you have been asked not only to provide a recommendation, butalso to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignmentfollows:To: The Assistant Financial AnalystFrom: Mr. V. Morrison, CEO, Caledonia ProductsRe: Cash Flow Analysis and Capital RationingWe are considering the introduction of a new product.Currently we are in the 34% tax bracket with a 15% discountrate. This project is expected to last five years and then,because this is somewhat of a fad project, it will beterminated. The following information describes the newproject:Cost of new plant and equipment: $ 7,900,000Shipping and installation costs: $ 100,000Unit sales:

Year Units Sold

year 1- 70,000year 2- 120,000year 3- 140,000year 4- 80,000year 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 initialworking capital requirement of $100,000 just to getproduction started. For each year, the total investment in networking capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital willincrease during years 1 through 3, then decrease in year 4.Finally, all working capital is liquidated at the termination of theproject at the end of year 5.Depreciation method: Straight-line over 5 yearsassuming the plant and equipment have no salvage valueafter 5 years.

Question

1. What is the project’s initial outlay?
2. What the project’s net present value? Should be projected be accepted? Why or why not?

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