Caledonia Products
Caledonia Products Company is introducing a new product. With previous fallouts from the company and ranging a 34% marginal tax bracket with a 15% required rate of return or cost of capital the change of direction is to initiate the new plan. Mr. V. Morrison, CEO, Caledonia products is asking for professional guidance to analyze his current cash flow statement to determine if the project of adding two mutually exclusive projects is profitable. Therefore, as an Assistant Financial Analyst, is take into account the interest to calculate Project A and Project B’s payback period, net present value, and internal rate of return to provide a recommendation on which project is tangible than the other.
Payback period
The payback period is the length of time required to break even on an investment measured in years. Where the annual cash flow is identical, the payback period is equal to the investment divided by the annual cash flow. The payback period emphasizes the liquidity of an investment but not its value. Caledonia Products have both projects A and B at an equal negative value of ($100,000) in the first year at an 11% rate of return.
Project
A Year UNDISCOUNTED FREE CASH FLOWS PVIF * 11%, n DISCOUNTED FREE CASH FLOWS CUMULATIVE DISCOUNTED FREE CASH FLOWS 0 ($100,000) 1.0 ($100,000) ($100,000) 1 $32,000 .901 $28,832.00 ($128,832.00) 2 $32,000 .812 $25,984.00 ($154,816.00) 3 $32,000 .731 $23,392.00 ($178,208.00) 4 $32,000 .659 $21,088.00 ($199,296.00) 5 $32,000 .593 $18,976.00 ($218,272.00) 3 years and 2 months The payback period for project A occurs in three years and two months to recover the money.
Project B Year UNDISCOUNTED FREE CASH FLOWS PVIF * 11%, n DISCOUNTED FREE CASH FLOWS CUMULATIVE DISCOUNTED FREE CASH FLOWS 0 ($100,000) 1.0 ($100,000) ($100,000) 1 $0 .901 $0.00 ($100,000.00) 2 $0 .812 $0.00 ($100,000.00) 3 $0 .731 $0.00 ($100,000.00) 4 $0 .659 $0.00 ($100,000.00) 5 $200,000 .593
Payback period
The payback period is the length of time required to break even on an investment measured in years. Where the annual cash flow is identical, the payback period is equal to the investment divided by the annual cash flow. The payback period emphasizes the liquidity of an investment but not its value. Caledonia Products have both projects A and B at an equal negative value of ($100,000) in the first year at an 11% rate of return.
Project
A Year UNDISCOUNTED FREE CASH FLOWS PVIF * 11%, n DISCOUNTED FREE CASH FLOWS CUMULATIVE DISCOUNTED FREE CASH FLOWS 0 ($100,000) 1.0 ($100,000) ($100,000) 1 $32,000 .901 $28,832.00 ($128,832.00) 2 $32,000 .812 $25,984.00 ($154,816.00) 3 $32,000 .731 $23,392.00 ($178,208.00) 4 $32,000 .659 $21,088.00 ($199,296.00) 5 $32,000 .593 $18,976.00 ($218,272.00) 3 years and 2 months The payback period for project A occurs in three years and two months to recover the money.
Project B Year UNDISCOUNTED FREE CASH FLOWS PVIF * 11%, n DISCOUNTED FREE CASH FLOWS CUMULATIVE DISCOUNTED FREE CASH FLOWS 0 ($100,000) 1.0 ($100,000) ($100,000) 1 $0 .901 $0.00 ($100,000.00) 2 $0 .812 $0.00 ($100,000.00) 3 $0 .731 $0.00 ($100,000.00) 4 $0 .659 $0.00 ($100,000.00) 5 $200,000 .593
References: Brandenburg, Jeff, 2008. Equipment Lease versus Buy considerations. Retrieved March 8, 2008 from, online source: www.cliftoncpa.com/Content/NWNV44O1SO.pdf?Name=CoopNewsletterSummer06.pdf