Business, Finance – Year 3

Finance Questions

“Caladonia Products” Integrative Problem

Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:

YEAR PROJECT A PROJECT B

0           –$100,000             –$100,000

1 32,000                    0

2 32,000                    0

3 32,000                    0

4 32,000                    0

5 32,000                $200,000

The required rate of return on these projects is 11 percent

Formulate answers and show all work

A. What is each project’s payback period?

B. What is each project’s net present value?

C. What is each project’s internal rate of return?

D. What has caused the ranking conflict?

E. Which project should be accepted? Why?

F. Describe the factors that Caladonia would have to consider if they were doing a lease versus buy for the two projects.

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