The major written assignment for the course is a Final Project. The purpose of the Final Project is for you to culminate the learning achieved in the course by describing your understanding and application of knowledge in the field of finance through the analysis of a mini case. From the Mini Case on page 329-330, parts “a” to “n,” summarize your analysis in a concise management statement . For parts “e” to “k,” use formulas to calculate the ratios and format the cells to insert a comma if there is more than three numbers. Round to the nearest whole number. Clearly label your analysis and the sum of your conclusions for all parts of the case in not more than 2,000 words.

Mini Case:

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 formation 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

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.

Questions to answer regarding the mini-case:

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?

Writing the Final Project

The Project:

•           Must include an introductory paragraph with a succinct thesis statement.

•           Must address the topic of the paper with critical thought.

•           Must conclude with a restatement of the thesis and a conclusion paragraph.

•           Must use APA style as outlined in the approved APA style guide to document all sources.

•           Must include a Reference Page that is completed according to APA style as outlined in the approved APA style guide