Please advise your deadline as well as the name of the book you are using: Title, author's name, and edition
deadline is 2 pm est. here is all the information you need . just answer questions 6 and 7 .
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% tax bracket with a 15% discount rate. This project is expected to last five years and then, because this is somewhat of a fad project, it will be terminated. The following information describes the new project
Cost of new plant and equipment:
Shipping and installation costs:
Sales price per unit:
$300/unit in years 1–4 and $260/unit in year 5.
Variable cost per unit:
Annual fixed costs:
$200,000 per year
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% 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.
Depreciation method: Straight-line over 5 years assuming the plant and equipment have no salvage value after 5 years.
Answer the following questions
What is its internal rate of return?
Should the project be accepted? Why or why not
Thank you :) but you cannot calculate the IRR without going through the whole problem anyway as you need to calculate the operating cash flows :) Please click on the following link to download the solution:
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