**What are the differential cash flows over the project’s life?**

Could someone help out with the exercise below? Any response

submitted would have to be an original work.

Read the Mini Case below about Caledonia Products and thoroughly

respond to Parts a to n at the end of the case. Your paper should

answer all of the questions of the Mini Case (without repeating the

questions), as a concise management statement in four to six pages

double- spaced pages. Explain the reasoning behind your answers and

support your answers with examples from the text and other

research. Where appropriate, properly cite the text or any other

source. For questions requiring calculations, use

formulas in Excel to calculate the ratios and format the

cells to insert a comma if there are more than three numbers.

Submit your work as a separate Excel document, in addition to your

analysis. Round dollar amounts to the nearest whole number and

percentages to two decimal places as a percentage. Clearly label

your analysis and the sum of your conclusions for all parts of the

case.

Mini Case From Chapter 11. BUS 401 Principles of

Finance

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:

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?

Note :- Soution formate is MS word doc .

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