How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Linda_us Your Own Question

Linda_us
Linda_us, Finance, Accounts & Homework Tutor
Category: Homework
Satisfied Customers: 7043
Experience:  Post Graduate Diploma in Management (MBA)
19873544
Type Your Homework Question Here...
Linda_us is online now
A new question is answered every 9 seconds

ts been 2 months since you took a position as an assistant

Resolved Question:

t’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: 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 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?
(Foundations of Finance for Ashford University, 7th Edition. Pearson Learning Solutions pp. 333 - 335).

Please complete in Excel showing calculations(mini case chapter 11):

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: 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 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
Submitted: 1 year ago.
Category: Homework
Expert:  Linda_us replied 1 year ago.
THIS ANSWER IS LOCKED!
You can view this answer by clicking here to Register or Login and paying $3.
If you've already paid for this answer, simply Login.
Linda_us, Finance, Accounts & Homework Tutor
Category: Homework
Satisfied Customers: 7043
Experience: Post Graduate Diploma in Management (MBA)
Linda_us and 6 other Homework Specialists are ready to help you
Customer: replied 1 year ago.

Linda,


I did not get the written portion of the paper, only the calculations. Is there some way for me to access this info again?

Expert:  Linda_us replied 1 year ago.


Click here

 

Download and keep it for your future reference.

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
< Last | Next >
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
  • I couldn't be more satisfied! This is the site I will always come to when I need a second opinion. Justin Kernersville, NC
  • Just let me say that this encounter has been entirely professional and most helpful. I liked that I could ask additional questions and get answered in a very short turn around. Esther Woodstock, NY
  • Thank you so much for taking your time and knowledge to support my concerns. Not only did you answer my questions, you even took it a step further with replying with more pertinent information I needed to know. Robin Elkton, Maryland
  • He answered my question promptly and gave me accurate, detailed information. If all of your experts are half as good, you have a great thing going here. Diane Dallas, TX
 
 
 

Meet The Experts:

 
 
 
  • Manal Elkhoshkhany

    Tutor

    Satisfied Customers:

    4520
    More than 5000 online tutoring sessions.
< Last | Next >
  • http://ww2.justanswer.com/uploads/BU/BusinessTutor/2012-2-2_115741_Kouki2.64x64.jpg Manal Elkhoshkhany's Avatar

    Manal Elkhoshkhany

    Tutor

    Satisfied Customers:

    4520
    More than 5000 online tutoring sessions.
  • http://ww2.justanswer.com/uploads/LI/lindaus/2012-6-10_04811_IMG20120609164157.64x64.jpg Linda_us's Avatar

    Linda_us

    Finance, Accounts & Homework Tutor

    Satisfied Customers:

    3121
    Post Graduate Diploma in Management (MBA)
  • http://ww2.justanswer.com/uploads/ComputersGuru/2010-02-13_051118_Photo41.JPG LogicPro's Avatar

    LogicPro

    Engineer

    Satisfied Customers:

    3035
    Expert in Java C++ C C# VB Javascript Design SQL HTML
  • http://ww2.justanswer.com/uploads/lanis/2009-4-1_233717_phput9xef_c1pm.jpg Lani S.'s Avatar

    Lani S.

    Tutor

    Satisfied Customers:

    2457
    Registered Nurse, Internet Researcher, Private Tutor
  • http://ww2.justanswer.com/uploads/chooser77/2009-08-18_162025_Chris.jpg Chris M.'s Avatar

    Chris M.

    M.S.W. Social Work

    Satisfied Customers:

    2341
    Master's Degree, strong math and writing skills, experience in one-on-one tutoring (college English)
  • http://ww2.justanswer.com/uploads/JawaadAhmed/2009-6-27_12137_SIs_SHadi.jpg F. Naz's Avatar

    F. Naz

    Chartered Accountant

    Satisfied Customers:

    1975
    Experience with chartered accountancy
  • http://ww2.justanswer.com/uploads/JK/jkcpa/2011-1-16_182614_jkcpa.64x64.jpg Bizhelp's Avatar

    Bizhelp

    CPA

    Satisfied Customers:

    1873
    Bachelors Degree and CPA with Accounting work experience