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Capital Budgetting of Caledonia Products
Finance & Accounting
Pages 5 (1255 words)
CAPITAL BUDGETTINGH OF CALEDONIA PRODUCTS INTRODUCTION This report addresses capital budgeting for Caledonia Products. Company is planning to introduce new product to the market and company seeks to analyze the investment opportunities by using capital budgeting techniques…
A- Caledonia Products should focus on free cash flows for evaluation of the project investment as compare to accounting profit in capital budgeting decision. Free cash flows provide the real picture of the amount that would be available to company from the project as the results are arrived with incorporating elements of time and risks in evaluation. Accounting profits, on other hand, are more like figures on paper only and due to ignorance of mentioned factors. There is every opportunity that accounting profits of the project shows an investment profitable, but it might be possible that the investment might not yield any returns to the company. Another reason to focus on cash flow results than accounting profits is accounting profits include all expenditure and incomes be it result in cash in-flow or outflow. For instance, depreciation does not actually cause any cash out-flow but it is included in the accounting profits. However, cash flow accounts only consider those that affect the movement in cash inwards or outwards. So, free cash flows should be used to evaluate any project. Since the report is evaluate new project and take decision to undergo or not, therefore, company should focus on incremental cash flows from the projects. There may be the case when overall company making positive cash flows whereas flow from the said project is otherwise. ...
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