Caledonia Products


Caledonia Products Integrative Problem
March 14, 2010

Caledonia Products Integrative Problem
    Caledonia Products has assigned Team-C, as special assistants to conduct risk analysis on a new project in question and give a recommendation for purchase. In the writing below a response to several questions aimed at the understanding of the capital-budgeting process. Discussed are cash flows as opposed to accounting profits. Cash flow diagram, initial outlay, and incremental cash flows for the project in five years. The project’s net value, internal rate of return and whether it should be accepted or not.
      When Caledonia decides to purchase the plasma cutting tool for the metal works division, they anticipate the new venture will increase future cash flows. Free cash flows may be the better option more willingly than profits alone. In the long term the benefits in cost will prove to be greater and the company can use the revenue for additional purposes.   Free cash flows are the net amounts of cash accumulated after expenses are paid. Caledonia should take in consideration the free cash flows option to measure the amount in value of the real cost of the new project. This approach the company can see revenue made while determining monthly expense. Free cash flows are calculated income from operations, minus taxes, plus depreciation, minus increase in capital expenditures. When spending on new projects, earnings from the venture should be sufficient for covering all cost of the entire project.
      The additional cash flow from operations can be measured from incremental cash flows. Caledonia should invest resources, capital, and time if the new project in place will increase cash flow. If the project has negative incremental cash flows with the project in place it is not a good option. Taxes and depreciation also have an effect on cash flows when forecasting budget with a new project.   Before and after tax cash flow is important because it...