Financial Management: Principles and Application - Caledonia, etc

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Prepare a response to the Caledonia Products Integrative Problem located near the end of Ch. 10 in Financial Management: Principles and Applications.

Formulate answers to questions 11a-11d, 12a–12e and 13a-13d

11. Caledonia is considering two investments with one-year lives. The more expensive of the two

is the better and will produce more savings. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following after-tax net cash flows:

YEAR PROJECT A PROJECT B

0 −$195,000 −$1,200,000

1 240,000 1,650,000

a. Calculate the net present value.

b. Calculate the profitability index.

c. Calculate the internal rate of return.

d. If there is no capital-rationing constraint, which project should be selected? If there is a capital-rationing constraint, how should the decision be made?

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

YEAR PROJECT A PROJECT B

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?

13. The final two mutually exclusive projects that Caledonia is considering involve mutually exclusive pieces of machinery that perform the same task. The two alternatives available provide the following set of after-tax net cash flows:

YEAR EQUIPMENT A EQUIPMENT B

0 −$100,000 −$100,000

1 65,000 32,500

2 65,000 32,500

3 65,000 32,500

4 32,500

5 32,500

6 32,500

7 32,500

8 32,500

9 32,500

Equipment A has an expected life of three years, whereas equipment B has an expected life of

nine years. Assume a required rate of return of 14 percent.

a. Calculate each project’s payback period.

b. Calculate each project’s net present value.

c. Calculate each project’s internal rate of return.

d. Are these projects comparable?

e. Compare these projects using replacement chains and EAAs. Which project should be selected? Support your recommendation.

Superior Manufacturing - Net Present Value Analysis

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Superior Manufacturing is thinking of launching a new product.  The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter.  Direct costs including labor and materials will be 55% of sales.  Indirect incremental costs are estimated at $80,000 a year.  The project requires a new plant that will cost a total of $1,000,000, which will be depreciated straight line over the next five years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000.  Assume there is no need for additional investment in building and land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%.   Based on this information you are to complete the following tasks. 

Prepare a statement showing the incremental cash flows for this project over an 8-year period. If the project required additional investment in land and building, how would this affect your decision? Explain.