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 vs. buying.
• Formulate answers to questions 1–7
• Describe factors Caledonia must consider if it were to lease vs. buying.
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: 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% 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
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 and $260/unit in year 5.
|
Variable cost per unit:
|
$180/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.
Comments
Post a Comment