Caledonia Products Integrative Problem Essay

The honouring observation ordain describe the decisions made by a financial analyst who is operative for the capital budget department at Caledonia Products. The organization has asked Team B to evaluate the potential risk involved in an upcoming transaction and identify several options in how to proceed. Because this is the teams first assignments dealings with risk analyzes the team has been ask to further explain the details. The organization summary will focus on openhanded hard hard cash in period of times, projection of cash flows, projects initial outgo, cash flow diagram, authorise present prise, interior(a) calculate of kick the bucket, and if the project should be accepted.Why focus on project free cash flowsTeam B believes that Caledonia should focus on the projects free cash flows and not the accounting wampum. Evidence exists that the accounting profits will be earned by the project because there is a positive cash flow to the shareholders. With any inv estment there is the anticipation that there will be an make up to the firms cash flow. Free cash flow is the total cash available to creditors who obtain invested their monies to finance the project. Accounting profits includes salutes such as depreciation, interest, and taxes to make do a business therefore it should not affect free cash flows. The project free cash flows range from stratum zero to year v and illustrate how much Caledonia Products will benefit if they choose to take on this project.Projection of project in years one with fiveThere is annual operative capital requirement of $100,000 to inform the project. The incremental cash flows for the project in years one through and through five shows gain. 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% increa se. In year two 23% increase and year three to four 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 require to purchase fixed assets and ensure they are in operating rear to start the project.Cost of new 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 $8,100,000Cash flow diagram$3,956,000$8,416,000$10,900,000$8,548,000$5,980,400($8,100,000) unclutter accede Value and cozy Rate of ReturnUnit Price x units sold1$21,0002$36,0003$42,0004$24,0005$15,600Therefore, NPV = $94,575.83NPV determine 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 wit h a project is done by evaluating either the internal rate of return or net present value. According to Investopedia, only otherwise things being equal, using internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings (Investopedia, 2013). If canvass one project to another, the one with the higher rate or return would be the more favorable one. In this instance several projects were not compared, and the IRR is below the current discount 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 calculated using very interlinking formula taking many 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 t o be feasible, and the project should 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