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Caladonia Products” Integrative Problem Based on your Week

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“Caladonia Products” Integrative Problem
Based on your Week Three readings, prepare a response to the Caladonia Products Integrative Problem located in Chapter 10 of the Financial Management: Principles and Applications text by Keown. In your response, be sure to address the following:

a. Formulate answers to questions 12a-12e.

b. Describe the factors that Caladonia would have to consider if they were doing a lease versus buy for the two projects.

It’s been two 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: XXXXX XXXXX 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 five years and then, because this is somewhat of a fad project, to 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 1–4, $260/unit in year 5

Variable cost per unit: $180/unit

Annual fixed costs: $200,000

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 five years. It is assumed that the plant and equipment will have no salvage value after five years.

12. Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:


0 -$100,000 -$100,000

1 32,000 0

2 32,000 0

3 32,000 0

4 32,000 0

5 32,000 $200,000

The required rate of return on these projects is 11 percent.

a. What is each project’s payback period?

b. What is each project’s net present value?

c. What is each project’s internal rate of return?

d. What has caused the ranking conflict?

e. Which project should be accepted? Why?
Submitted: 6 years ago.
Category: Finance
Expert:  Manal Elkhoshkhany replied 6 years ago.

Just to make sure I understand correctly. You want the answers to:


questions 12a-12e, right?

Customer: replied 6 years ago.
yes that is correct
Expert:  Manal Elkhoshkhany replied 6 years ago.
Manal Elkhoshkhany and 2 other Finance Specialists are ready to help you
Expert:  Manal Elkhoshkhany replied 6 years ago.

Please advise if you needed any clarification


Thank you

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