Caledonia Products Mini-Case in Financial Management
Determining the outflows and inflows of the equipment determines the net leasing advantage. When leasing rather than purchasing the company will avoid some operating expenses, there is no asset salvage value after lease is over, tax deductible expense associated with depreciation and interest is lost; an after-tax rental expense is incurred (Brigham & Houston, 2009).
Net present value of the project
The appropriate rate of return is 11%.
Firstly the total projected cash flow’s present value is obtained by use of the rate of return of 11%.
The operations’ cash flow is 32,000, 32,000, and 32,000. 32,000 and 32,000
The projected cash inflow for the present value is -28,828.83, -25.971.92. -23, 398.12, -21,079.39 and -18,990.44
The total projected cash inflow for the present value is 118.268.70
Net present value = projected cash inflow’s present value + Initial investment
Net present value = 118,269 + (-100,000)
= 118,269 – 100,000
Net present value 18,269
Internal rate of return
The project A’s internal rate of return is 18.03% while that of project B is 14.87
Reference
Brigham, E.F & Houston, J.F. (2009) Fundamentals of financial management 12thEdition, Boston: South-Western College Pub
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