Caledonia focuses on project-free cash flows as opposed to the accounting profits earned by the project as far as it is more reasonable for the company to count not only profits but also spending. For the company which starts its development, it is very venturesome to invest money without the confidence in its return. If the project fails the company in this case becomes bankrupt. As we can see from this project, the necessary sum for starting production for the project is $100,000 but the whole cost of the equipment is $7, 900,000 plus shipping and installation costs which are $100,000. Factually all these costs are liquidated during five years. The whole profit for five years will be $ 141,000,000. Factually, this project is quite profitable for the company if its success is guaranteed.
It should be noted, that the incremental cash flows do not have stable earnings and profits. The earnings and profits vary during the five years. The first three years guarantee the rise of profits but the last two years present the decay of profits. Factually, this project is very profitable for the company but if these profits are not justified, the company fails as far as not every company can afford the spending for this project. Such risky projects are for companies that are quite stable in the market and whose production is in demand.
The project’s initial outlay is $ 8,000,000 including new plant and equipment and shipping and installation costs. Such initial costs are quite risky for the company. The price per unit is $300 during the first four years. During the first year, 70,000 units were sold which is $21,000,000. During the second year, the profits will be 300$ Ë£120,000 which is $36,000,000. As for the third year, the profits will be $300Ë£140,000 which is $42,000,000. The fourth-year provides the profits which account for $300Ë£80,000 namely 24,000,000.
The last year is the least profitable namely it provides $260Ë£60,000 accounts to $15,600,000. It should be noted that these profits are not guaranteed and stable as far as the price of the product may vary because of the changes in the market.
The price may vary from $180 to $300. The success of the company depends on the market conditions. Even if the project is well-presented and calculated, it is very difficult to guarantee its success as far as five years is not a short term and everything may be changed. It is up to the company whether to accept this project or not. More than that, it depends on the general profits of the company. If the company may compensate the costs for this project, it may be accepted without any doubt if these costs are quite unprofitable and risky for the stability of the company.
Comparing the costs which account for $8,000,000 and profits for five years which are nearly $141,000,000, this project seems to be very profitable. Nevertheless, the company should take into account all factors such as the demands for their products, the possible changes in the world market, and the approaching crisis. The cost of the product may vary and if this product will not be in demand, the sales of this product will be unprofitable for the company and not compensate for the primary spending. It is quite difficult to conclude this project as far as not every factor is included in its presentation.