What is its internal rate of return

timer Asked: Mar 25th, 2014

Question description

Working capital requirements: There will be an initial working capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.

Depreciation method: Straight-line over 5 years assuming the plant and equipment have no salvage value after 5 years.


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?


What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?


What is the project’s initial outlay?


Sketch out a cash flow diagram for this project.


What is the project’s net present value?


What is its internal rate of return?


Should the project be accepted? Why or why not

Problems should be worked out in full.

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