The Caledonia Mini Case


From the Mini Case on page 329-330, parts “a” to “d,” summarize your analysis in a concise management statement not to exceed a total of 1,200 words. 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 your conclusions in not more than 500 words.

  1. 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?
  2. How does depreciation affect free cash flows?
  3. How do sunk costs affect the determination of cash flows?
  4. What is the project’s initial outlay?
  5. What are the differential cash flows over the project’s life?
  6. What is the terminal cash flow?
  7. Draw a cash flow diagram for this project.
  8. What is its net present value?
  9. What is its internal rate of return?
  10. Should the project be accepted? Why or why not
  11. In capital budgeting, risk can be measured from three perspectives. What are those three measures of a project.
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