Even though project B appears to be a better return on investment, it really isn’t. Project A will give the company an immediate return of $32,000 and for an additional four years. This will allow Caledonia to reinvest this money immediately. Project B, on the other hand, will leave the company waiting to receive any return on their investment. This project will leave Caledonia tied up for five years, with no cash flows to reinvest.
This will inhibit the company’s ability to maximize stockholders’ wealth. E. Which project should be accepted? Why? (Charles) Project A as opposed to Project B because for starters it has a higher AIR of 18% as opposed to 15% for Project B. Evaluation of the NP of the two projects shows that Project B has a NP that is larger than Project A and therefore would increase shareholder wealth more, but under further evaluation we saw that Project A received funds at a faster rate, money that can be reinvested to earn more money, while Project B receives its funds at a later date.
In the end as stated earlier we chose Project A and gave up the extra 3% rate of return for the access to funds in earlier periods. NP for Project A= 32,000*3. 696= 118,272-100,000 for a net present value of 18,272. NP for project for a net present value of 81,400. Describe factors Caledonia must consider if they were doing a lease versus buy. (Kate) The factors Caledonia would have to consider if they were wanting to lease or buy would be initial payments, payments/costs during the lease, tax benefits, if any, equipment leasing/buying, and other legal obligations.
The advantages of leasing are there may not be a down payment for building or equipment rental; rather the payments would be periodic, meaning no restrictions on the company’s financial operations. Payments could be spread out over a longer period of time than if they received a loan, any leased equipment or buildings would not depreciate, and the lease payments are tax deductible (Para. 14). The disadvantages of leasing would be the lease costs more because the company does not claim ownership to any borrowed assets.
This affects the company because hey cannot claim depreciation of equipment on their taxes, nor can they claim salvage of any used equipment. Leases are also considered long-term legal obligations, so Caledonia would need to consider this when deciding whether or not they want to buy or lease (Para. 18). References Shown, Arthur J. , John D. Martin, J. William Petty, and David F. Scott Jar. (2005). Financial management: principles and applications. (10th deed. ). Pearson Education, Prentice Hall, Upper Saddle River, N. J. Management Resources. Lease versus buy equipment decision. Retrieved from: http://www. Bizarre. Com/general/mom. Tm
