Cash Flow (Incremental)
Fin370 Week 4 Learning Team Assignment
Caledonia should focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project because cash flows formulas focus on the project itself. Free cash flow formula determines whether an investment adds value to the firm, which important to Caledonia’s management. Since one of a firm’s primary goal is to gain profits for its stakeholders, using free cash flow formula would offer the most valuable information in the decision of proceeding with a new investment.
2.
Incremental Cash Flows Years 1-5
| YEAR 1 | YEAR 2 | YEAR 3 | YEAR 4 | YEAR 5 |
Project Revenues (sales price/unit * # units) | 21,000,000 | 36,000,000 | 42,000,000 | 24,000,000 | 15,600,000 |
Cost of Goods Sold ($180/unit) | 12,600,000 | 21,600,000 | 25,200,000 | 14,400,000 | 10,800,000 |
Gross Profit | $8,400,000 | $14,400,000 | $16,800,000 | $9,600,000 | $4,800,000 |
Cash operating expenses | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 |
Depreciation ($7.9M/5) | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 |
Net Operating Income | 6,620,000 | 12,620,000 | 15,020,000 | 7,820,000 | 3,020,000
Taxes (34%) | 2250800 | 4290800 | 5106800 | 2658800 | 1026800 |
NOPAT | 4,369,200 | 8,329,200 | 9,913,200 | 5,161,200 | 1,993,200 |
Add Depreciation | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000
Operating Cash Flow | $5,949,200 | $9,909,200 | $11,493,200 | $6,741,200 | $3,573,200
These cash flows differ from accounting profits or earnings because they identify how much cash is available to the business. Profits indicate how much money is left after the company has sold its good and service from a performance standpoint. A company needs to be profitable, but it also needs to ensure there is cash available when needed. The cash flow statement allows the company to plan for purchasing raw materials and paying off taxes, debt and any other expenses.
Caledonia should focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project because cash flows formulas focus on the project itself. Free cash flow formula determines whether an investment adds value to the firm, which important to Caledonia’s management. Since one of a firm’s primary goal is to gain profits for its stakeholders, using free cash flow formula would offer the most valuable information in the decision of proceeding with a new investment.
2.
Incremental Cash Flows Years 1-5
| YEAR 1 | YEAR 2 | YEAR 3 | YEAR 4 | YEAR 5 |
Project Revenues (sales price/unit * # units) | 21,000,000 | 36,000,000 | 42,000,000 | 24,000,000 | 15,600,000 |
Cost of Goods Sold ($180/unit) | 12,600,000 | 21,600,000 | 25,200,000 | 14,400,000 | 10,800,000 |
Gross Profit | $8,400,000 | $14,400,000 | $16,800,000 | $9,600,000 | $4,800,000 |
Cash operating expenses | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 |
Depreciation ($7.9M/5) | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 |
Net Operating Income | 6,620,000 | 12,620,000 | 15,020,000 | 7,820,000 | 3,020,000
Taxes (34%) | 2250800 | 4290800 | 5106800 | 2658800 | 1026800 |
NOPAT | 4,369,200 | 8,329,200 | 9,913,200 | 5,161,200 | 1,993,200 |
Add Depreciation | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000 | 1,580,000
Operating Cash Flow | $5,949,200 | $9,909,200 | $11,493,200 | $6,741,200 | $3,573,200
These cash flows differ from accounting profits or earnings because they identify how much cash is available to the business. Profits indicate how much money is left after the company has sold its good and service from a performance standpoint. A company needs to be profitable, but it also needs to ensure there is cash available when needed. The cash flow statement allows the company to plan for purchasing raw materials and paying off taxes, debt and any other expenses.