Mini Case This Mini Case is available in MyFinanceLab. Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your first assignment, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital-budgeting process. This is a standard procedure for all new financial analysts at Caledonia, and it will serve to determine whether you are moved directly into the capital-budgeting analysis department or are provided with remedial training. The memo- randum you received outlining your assignment follows: To: The New Financial Analysts From: Mr. V. Morrison, CEO, Caledonia Products Re: Capital-Budgeting Analysis Provide an evaluation of two proposed projects, both with 5-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to Caledonia's highly successful Avalon product line, and as a result, the required rate of return on both projects has been established 12 percent. The expected free cash flows from each project are as follows: PROJECT B PROJECT A -$110,000 -$110,000 Initial outlay 40,000 20,000 Inflow year 1 40,000 Inflow year 2 30,000 Inflow year 3 40,000 40,000 Inflow year 4 40,000 50,000 Inflow year 5 70,000 40,000 You have also been asked for your views on three unrelated sets of projects. Each set of projects made by the NPV and IRR methods? involves two mutually exclusive projects. These projects follow. Caledonia is considering is the better and will produce two investments with 1-year lives. The more expensive of the two more savings. Assume these proiects are mutually exclusive m. and that the required rate of return is 10 percent. Given the following free cash flows: PROJECT A PROJECT B Initial outlay -$195,000 -$1,200,000 Inflow year 1 240,000 1,650,000 1. Calculate the NPV for each project. 2. Calculate the PI for each project. 3. Calculate the IRR for each project. 4. If there is no capital-rationing constraint, which project should be selected? If there is a capital-rationing constraint, how should the decision be made? Caledonia is considering associated with these projects two additional mutually exclusive projects. The free cash flows are as follows: n. PROJECT B PROJECT A -$100,000 -$100,000 Initial outlay 0 32,000 Inflow year 1 0 32,000 Inflow year 2 32,000 Inflow year 3 0 32,000 Inflow year 4 200,000 32,000 Inflow year 5 The required 1. What is each project's payback period? 2. What is each project's NPV? 3. What is each project's IRR? 4. What has caused the ranking conflict? 5. Which project should be accepted? Why? rate of return on these projects is 11 percent