FIN/370 Version 7
Finance for Business
FIN 370 Week 4 Learning Team Caledonia Products Integrative Problem
Prepare a response to the Caledonia Products Mini-Case located near the end of Ch. 12 in Financial Management.
Formulate answers to questions 1–7
Describe factors Caledonia must consider if it were to lease versus buying.
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?
When choosing between project free cash flows and accounting profits earned by Caledonia’s new project, it is better to focus on the project free cash flows. When focusing on project free cash flows, Caledonia is able to measure its financial performance by calculating its working cash flow while subtracting its expenses. When Caledonia is looking at project free cash flows, it should evaluate the amount of cash it can make after all required costs and expenses are considered. (http://www.investopedia.com/terms/f/freecashflow.asp)
If Caledonia was to only focus on accounting profits, it would not have an accurate count of the current assets and cash on hand to use as working capital at any given time. This way of record keeping works great in long term scenarios, however with Caledonia only looking 5 years into the future, it is best to keep better track of the money generated by the new venture. By doing this, Caledonia will be able to grow, expand, and branch out in its other operations, as well as begin to consider other potential business moves to continue its successful business.
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?
The incremental cash flows that will be used for Caledonia in years 1-5 are, net operating cash flow, the salvage value (net), and the initial investment outlay. The outlay is cash expenditures, and changes in working capital...