22 Jul WHAT IS THE PROJECTS NET PRESENT VALUE?
a response to the following case study problem. Caledonia Services is looking to invest in a Show more Prepare a response to the following case study problem. Caledonia Services is looking to invest in a new software platform. You have been tasked to decide if the cash flows from the project are adequate: The following expectations for the project have been given to you: Cost of new servers and building $10000000. Depreciation is over five years on a straight-line basis and at the end of five years the servers and building will be sold for an expected $1000000. Fixed costs are $300000 per year. Unit software sales from the new platform are expected to be as follows: Year 1 50000 Year 2 100000 Year 3 150000 Year 4 150000 Year 5 100000 The product will sell for $300/unit in years 1-3; $250 in years 4 and 5 Variable costs are $200/unit At the start of the project Caledonia will need $200000 in cash for working capital. For years 1-5 additional working capital will be needed equal to 10% of sales revenues in addition to the initial $200000. The cash flow impact is the netincrease/decrease in working capital in each year. All working capital is released in year 5. There is a 35% tax rate and the companys discount rate is 12% Determine the following: 1) Why should Caledonia focus on the projects free cash flows versus the accounting profits earned by the project in determining whether to fund the project? 2) What are the incremental cash flows for the project in years 1-5? 3) What is the projects initial cash outlay? 4) What is the projects net present value? 5) What is the internal rate of return? 6) Should the project be accepted? Why or why not? Additionally describe factors Caledonia must consider if they were deciding whether to do a lease versus buy. Show less
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