Calodenia
1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project?
Free cash flow is one of the most important factors when looking at any new business or starting a new product. When calculating free cash flow, the business owner or management will able to have an idea about the cash that the company is generating enough cash to start new product or expand its business. Caledonia should focus on project free cash flows as opposed to the accounting profit earned by the project when analyzing whether to undertake the product. This information will help her deciding whether the project will generate enough money and profit or not. Also looking at free cash flow allows Caledonia and management to conduct opportunities that promote shareholder value. Caledonia must realize and understand developing a new product without cash flow is tough and almost impossible. Having healthy free cash flow the company will have a lot of flexibility, and also will have the choice lunch new product and stop it after five years. On the other hand if the company does not have this flexibility the option of starting new product and terminated on the fifth year will be a big risk. 2. What are the incremental cash flows for the project in years1 through 5 and how do these cash flows differ from accounting profits or earnings?
Years | 0 | 1 | 2 | 3 | 4 | 5 | Units Sold | 0 | 70000 | 12000 | 14000 | 80000 | 60000 | Sales Price | 0 | $300.00 | $300.00 | $300.00 | $300.00 | $260.00 | Revenue | 0 | $21,000,000.00 | $36,000,000.00 | $42,000,000.00 | $24,000,000.00 | $15,600,000.00 | Variable cost | 0 | $12,600,000.00 | $21,600,000.00 | $25,200,000.00 | $14,400,000.00 | $10,800,000.00 | Fixed Cost | 0 | $200,000.00 | $200,000.00 | $200,000.00 | $200,000.00 | $200,000.00 | EBDIT | 0 | $82,000,000.00 | $14,200,000.00 | $16,600,00.000 | $9,400,000.00 | $4,600,000.00 | Less
Free cash flow is one of the most important factors when looking at any new business or starting a new product. When calculating free cash flow, the business owner or management will able to have an idea about the cash that the company is generating enough cash to start new product or expand its business. Caledonia should focus on project free cash flows as opposed to the accounting profit earned by the project when analyzing whether to undertake the product. This information will help her deciding whether the project will generate enough money and profit or not. Also looking at free cash flow allows Caledonia and management to conduct opportunities that promote shareholder value. Caledonia must realize and understand developing a new product without cash flow is tough and almost impossible. Having healthy free cash flow the company will have a lot of flexibility, and also will have the choice lunch new product and stop it after five years. On the other hand if the company does not have this flexibility the option of starting new product and terminated on the fifth year will be a big risk. 2. What are the incremental cash flows for the project in years1 through 5 and how do these cash flows differ from accounting profits or earnings?
Years | 0 | 1 | 2 | 3 | 4 | 5 | Units Sold | 0 | 70000 | 12000 | 14000 | 80000 | 60000 | Sales Price | 0 | $300.00 | $300.00 | $300.00 | $300.00 | $260.00 | Revenue | 0 | $21,000,000.00 | $36,000,000.00 | $42,000,000.00 | $24,000,000.00 | $15,600,000.00 | Variable cost | 0 | $12,600,000.00 | $21,600,000.00 | $25,200,000.00 | $14,400,000.00 | $10,800,000.00 | Fixed Cost | 0 | $200,000.00 | $200,000.00 | $200,000.00 | $200,000.00 | $200,000.00 | EBDIT | 0 | $82,000,000.00 | $14,200,000.00 | $16,600,00.000 | $9,400,000.00 | $4,600,000.00 | Less