# Team D Caledonia Products

Caledonia Products Integrative Problem
Michelle M. Rayford, Peter Pontone, and Sibylle Letzelter
FIN/370
June 18, 2012
Laura Haase

Caledonia Products Integrative Problem
Question 1
Caledonia should focus on project free cash flows as opposed to accounting profits earned because free cash lows show the value of the projects.   Caledonia needs to isolate the project independent from regular company financials to understand how the project will contribute value to the business.   Accounting profits earned will take into account the entire business and it will not isolate the project.   A good example is dry cleaners that decide to open up a second location.   The owner needs to look at the cash flow from the second store on its own to see if it will add enough value on its own.   If you look at just the accounting profits, it might indicate that the company will be “more” profitable.   However, that does not show how much the new project contributes on its own.

Question 2
Incremental Cash Flows Years 1-5
|   YEAR 1 | YEAR 2 | YEAR 3 | YEAR 4 | YEAR 5 |
Project Revenues (sales price/unit * # units) | 21,000,000 | 36,000,000 | 42,000,000 | 24,000,000 | 15,600,000 |
Cost of Goods Sold (\$180/unit) | 12,600,000 | 21,600,000 | 25,200,000 | 14,400,000 | 10,800,000 |
Gross Profit | \$8,400,000 | \$14,400,000 | \$16,800,000 | \$9,600,000 | \$4,800,000 |
Cash operating expenses | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 |
Depreciation (\$7.9M/5) | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 |
Net Operating Income | 6,620,000 | 12,620,000 | 15,020,000 | 7,820,000 | 3,020,000 |
Taxes (34%) | 2250800 | 4290800 | 5106800 | 2658800 | 1026800 |
NOPAT | 4,369,200 | 8,329,200 | 9,913,200 | 5,161,200 | 1,993,200 |
Add Depreciation | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 |
Operating Cash Flow | \$5,949,200 | \$9,909,200 | \$11,493,200 | \$6,741,200 | \$3,573,200 |

These cash flows differ from accounting profits or earnings...