Running head: Caladonia Products Integrative problem

Caladonia Products Integrative Problems

12- a
Payback period is the time in which the whole project cost is recovered.
Project A = 100000/32000 = 3.125 year
Project B = 4.5 years

12-b
NPV

5
Project A = -100000 + 32000 (1.15) pwr t = $18268
T=0
Project B = -100000 + 200000(1.15) pwr 5 = -$564
12-c
project
A

year
0
1
2
3
4
5

project
B

100,000 100,000
32000
0
32000
0
32000
0
32000
0
32000 200,000
18%
15%

Caledonia Products plans to use one to two projects, Project A or Project B. If the projects
will end 5 years, the required rate of return will turn out to be 11%. Projects A IRR comes out to
18%, which project B's IRR comes out to 15%. Both IRRs are higher than the required so the
project would be accepted.

12-d
There are three different conflicts that affect the ranking problems. Size disparity problem, Time
disparity problem and Unequal life problem are the three that must be considered when
calculating capital rationing. In our team scenario the ranking conflict is caused by the time
disparity of the rate of return from the project.
Project A has the net present value (NPV) of $18,268.00 and the time of return is 3.125 years.
Project B has a NPV of $564.00 and rate of return for its investors of 4.5 years.
The most acceptable assumption would be project A due to its rate of return of the two projects.

12-e
Project A shows to have a greater potential from the information we have shown above. Project A
has a 18% IRR and project B only has a 15% IRR. This shows project A to have the greater
potential in making a profit. The time of return is less in project A
Part B
If Caladonia would lease instead of buy the two projects they would need to look at several
factors to see if it would be beneficial. Leasing would offer an alternative in keeping customers
cash flow and does not require a large cash outlay. The monthly payments are the same every
month. There is also a tax benefit and helps with the credit line for future expansions if needed.
The turn around on product is faster with leasing because it can be done in the same day.
Caladonia can lease by long term and have lower payments over a period of time with out the
large up front cash payment.