Reference no: EM13323918
It's been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given your lack of tenure at Caledonia, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignment follows:
• To: The Assistant Financial Analyst
• From: Mr. V. Morrison, CEO, Caledonia Products
• Re: Cash Flow Analysis and Capital Rationing
We are considering the introduction of a new product. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the new project:
Cost of new plant and equipment $ 7,900,000
Shipping and installation costs $ 100,000
Unit sales
YEAR UNITS SOLD
________________________________________
1 70,000
2 120,000
3 140,000
4 80,000
5 60,000
Sales price per unit $300/unit in years 1 through 4, $260/unit in year 5
Variable cost per unit $180/unit
Annual fixed costs $200,000 per year in years 1-5
Working-capital requirements There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.
The depreciation method Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years.
• a. Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits?
• b. How does depreciation affect free cash flows?
• c. How do sunk costs affect the determination of cash flows?
• d. What is the project's initial outlay?
• e. What are the differential cash flows over the project's life?
• f. What is the terminal cash flow?
• g. Draw a cash flow diagram for this project.
• h. What is its net present value?
• i. What is its internal rate of return?
• j. Should the project be accepted? Why or why not?
• k. In capital budgeting, risk can be measured from three perspectives. What are those three measures of a project's risk?
• l. According to the CAPM, which measurement of a project's risk is relevant? What complications does reality introduce into the CAPM view of risk, and what does that mean for our view of the relevant measure of a project's risk?
• m. Explain how simulation works. What is the value in using a simulation approach?
• n. What is sensitivity analysis and what is its purpose?
|
Write possible goal-scope and functional unit for the lca
: You are preparing a life-cycle assessment of different transportation options for getting from your house to work (10 miles each way). The options include carpooling with three or more people, one person in a car, bicycling, or taking the bus.
|
|
What distance does the particle move
: The position of a particle moving along the x axis depends on the time according to x=ct^2-bt^3, what distance does the particle move and what is its displacement
|
|
Provide a reasonable design for a efficient esp treating
: The particles have an effective drift velocity of 10.0 cm/s. Specify the total plate area, channel width, number and size of plates, number of electrical sections (total and in direction of flow), and total corona power to be supplied, and estimat..
|
|
What would you recommend if the sole goal of your firm
: Your company is trying to decide whether to raise the price of your product from $$7.5 by $0.50 or lower it by $0.50. Given the above information what would you recommend if the sole goal of your firm is to increase the total revenue?
|
|
What is sensitivity analysis and what is its purpose
: Explain how simulation works. What is the value in using a simulation approach and what is sensitivity analysis and what is its purpose?
|
|
What is the element''s atomic mass number
: An element in its solid phase has mass density 2100kg/m3 and number density 4.39×1028atoms/m3. What is the element's atomic mass number
|
|
Review the type of job analysis
: Review the type of job analysis used by your organization, and determine if it is effective. Then, evaluate whether other types of analyses would work better for the type of work performed in your organization.
|
|
Determine the shear streess and angle of twist at b
: A solid titanium is titghly inserted into a hollow section of length l/2 and constan thickness t=7.5mm , and extends from end B towards end A. determine the shear streess and angle of twist at B.
|
|
Write the program code to handle as many as 40 test scores
: Write the program code to handle as many as 40 test scores; however, for this assignment you will enter only the following five scores: 70, 80, 60, 80, 70
|