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Michael Wright graduated from the University College in June and has been working for about a month as a junior financial analyst at Caledonia Products Ltd. When Michael arrived at work on Monday morning, he found the following memo in his e-mail.

TO: Michael Wright

FROM: V. Morrison, CFO, Caledonia Products Ltd.

RE: Capital Budgeting Analysis

Provide an evaluation of the three proposed projects whose cash flow forecasts are found below:

Product A Product B Product C

Initial cost $760,000 $650,000 $512,000

Expected life 5 years 5 years 4 years

Scrap value expected $30,000 $35,000 $20,000

Expected cash inflows: $ $ $

Year

1 320,000 200,000 200,000

2 300,000 240,000 210,000

3 240,000 210,000 180,000

4 320,000 260,000 160,000

5 180,000 180,000

Since these projects involve additions to Caledonias highly successful Avalon product line, the company requires a rate of return on each project equal to 24 percent. The company relies on a number of criteria when evaluating new investment opportunities. The projects are independent.

Give me your thoughts on these two projects by 10 am on Wednesday Morning.

Michael was not surprised by the memo, for he had been expecting something like this for some time. Caledonia followed a practice of testing each of their new financial analyst with some type of project evaluation exercise after they have been on the job for a few months. After re-reading the memo, Michael decided on his plan of action and made up the following to do list:

Calculate for each project:

1. The payback period for each project 6 marks
2. The Net Present value (NPV) 10 marks
3. The Profitability Index (PI) 9 marks
4. Which project should be accepted and why? 4 marks
5. Define capital budgeting. 2 marks
6. Give four reasons why capital budgeting decisions are important. 4 marks

Prepare Michaels assignment for his Wednesday meeting with the CFO by filling out your response to the to do list above. Total 35 marks

PVIF _24%

1	0.8065
2	0.6504
3	0.5245
4	0.4230
5	0.3411

Course name: financial Management I

Due date: January 22, 2022, Eastern Standard Time 10 pm

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