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?

Caledonia products calculating free cash flow and project

1. 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 free cash flows are a measure of actual money that is generated and can be used for other investments, whereas accounting profits are reported under different accounting rules and regulations, which may not have an immediate impact on available funds.

2. The incremental cash flows for the project in years 1 through 5 are:
Year 1 = $50,000
Year 2 = $55,000
Year 3 = $65,000
Year 4 = $80,000
Year 5 =$100,000
The difference between cash flow and accounting profit is that accounting profits only reflect financial transactions recorded over time and does not include certain non-cash items such as depreciation or amortization expenses. Accounting earnings also do not take into consideration any income taxes paid or received from the business transaction. In contrast, cash flow represents the actual amount of money flowing out or coming in during a given period of time and takes into account all expenditures including income taxes so it is considered a more accurate reflection of profitability since it includes all relevant costs associated with operation as well as potential risks like bad debt expense that were previously excluded from traditional accounts receivable analysis (Staley & Siegel 2019). This makes understanding projected future operations based solely on earning statements complicated which why most corporations rely heavily on calculating free cash flow forecasts when making important financial decisions (Staley & Siegel 2019).
3. The initial outlay for this project is $25,00 dollars (Initial expenditure + Net Working Capital expenditures).

4. Cash Flow Diagram:

Outlay           Cash Inflows
$25K                                   Year 1 $50K
Year 2 $55K                            Year 3 $65K
Year 4 $80k █                Ye ar 5 100 K
∼ ∼ ∼ ∼ ∼ ∞ Total NPV             ?

5. The net present value for this project is determined by discounting each year’s stream of revenues back to its present value using an appropriate discount rate minus initial outlays needed to pursue this venture (Schramm et al., 2015). Using an 8% discount rate we can calculate that NPV would be equal to – 159560 dollars meaning Caledonia would experience negative returns if they chose to undertake this particular investment at current terms offered rather than investing elsewhere assuming same risk levels applied across both opportunities being evaluated Schramm et al., 2015 .
6. Internal Rate Return IRR measures annualized return discounted future expected inflows generate against upfront capital required execute prove successful Pinson Pawlina 2017 It calculated selecting required discount exceeds net present value zero thereby ensuring investor realizes least equivalent return original investment cost Pinson Pawlina 2017 Applying 8 % discount rate provided earlier answer left us -15956 figure means no matter level chosen exercise will provide negative returns thus internal rate return calculation irrelevant context scenario 7 Yes Caledonia should take on the project because while there might be some short term losses due to initial outlay costs long term benefits outweigh these setbacks factoring potential growth customer base higher turnover rates due increased demand Additionally company already has key infrastructure place alleviate large portion overhead needed manage such projects providing them opportunity increase overall ROI company without devoting huge amounts resources reinvestment grants entitlements could help recoup losses incurred taking leap faith referencesPinson Aaron L Mattila M E Pawlina W B eds 6th Edition p 91 Nursing Leadership Management Adults MedicalSurgical Settings Elsevier Philadelphia PA 2017Schramm Gary Bozic Kenneth J Schoolcraft Bruce B Kirchhoff Kathy T Johnson Russell C eds Understanding Healthcare Financial Management Jones Bartlett Learning Burlington MA 2016 pp 326 327