Caledonia Products Integrative Problem
Learning Team C
Jean Deegan, Tim Meister, Deborah Smith, Willie Small, Jr., Tracey Pryor
Finance for Business
FIN/370
Brenda Jaber
April 29, 2013
Caledonia Products Integrative Problem
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 use free cash flows opposed to accounting profits to measure the free cash flows or incremental cash flows that are associated with the organization`s new investment proposal. It is very important that Caledonia understand that these are the flows the firm receives and could reinvest in other projects. If the company wish to analyze appropriately the timing of the benefits or cost associated with the new project, this measuring tool will be the best choice for the company. It will be as important to provide financial information to shareholders, and free cash flows show that the company interest in these cash flows include after tax information, which is vital for shareholders from a standpoint of investing in the company`s projects. Marginal benefits are also important because it involves incremental cash flows, and this will help Caledonia to increase the value of the organization.
What are the incremental cash flows for the project in years one through five and how do these cash flows differ from accounting profits or earnings?
|YEAR |PROJECT A |PROJECT B |
|0 |-$100,000 |-$100,000 |
|1 |$32,000 |$0 |
|2 |$32,000 |$0 |
|3 |$32,000 |$0...