Fin370 Wk4 Caledonia Products Integrative Problem

Caledonia Products Integrative Problem
Team A

FIN/370
April 10, 2012
Instructor


  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 flow rather than accounting profits because free cash flow comes from the business, which can be plowed back into the business. Free cash flow will enable Caledonia to have a firmer grasp of the cost, that would be on the projects. Accounting deals with credits and debits, while free cash flow deals with more of the nuts and bolts of the organization, from a more hands-on perspective. If the project was looked at from accounting terms, the project would be more of a loss. Project free cash flow gives more of a general overview of what is involved in the project.


  2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?

|                           |               |               |               |               |               |                 |
|Operating Cash Flow         |               |$5,956,000     |$9,916,000     |$11,500,000     |$6,748,000     |$3,580,000       |
|- Change in Net Working     |$100,000       |$2,000,000     |$1,500,000     |$600,000       |($1,800,000)   |($2,400,000)     |
|Capital                     |               |               |               |               |               |                 |
|Change in Capital Spending |$8,000,000     |0               |$0             |0               |0               |0               |
|Incremental   Cash Flow:     |($8,100,000)   |$3,956,000     |$8,416,000     |$10,900,000     |$8,548,000     |$5,980,000       |
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