Caledonia Products Company launches a new product. Given the company's past spinoffs and a marginal tax bracket of 34% with a required rate of return or cost of capital of 15%, the change in direction is to launch the new plan. MV Morrison, CEO of Caledonia Products, seeks professional advice to analyze his current cash flow status to determine if the plan to add two mutually exclusive projects is profitable. Therefore, as an assistant financial analyst, one must consider interest to calculate the payback period of Project A and Project B, net present value and internal rate of return to provide a recommendation on the project which is more tangible than the other. is the time required to reach the break-even point of an investment, measured in years. When the annual cash flow is the same, the payback period is equal to the investment divided by the annual cash flow. The payback period emphasizes the liquidity of an investment but not its value. Caledonia Products has both projects A and B with an equal negative value of ($100,000) in the first year at a rate of return of 11%. ProjectA Year UNDISCCOUNTED FREE CASH FLOW PVIF * 11%, n CASH FLOW FREE DISCOUNTED CUMULATIVE FREE CASH FLOW 0 ($100,000) 1.0 ($100,000) ($100,000)1 $32,000 0.901 $28,832.00 ($128,832.00)2 $32,000 0.812 25 98 4 $.00 ($154,816.00)3 $32,000 0.731 $23,392.0 0 ($178,208.00)4 $32,000 0.659 $21,088.00 ($199,296.00)5 $32,000 0.593 $18,976.00 ($218,272.00) 3 years and 2 monthsProject A's payback period extends to three years and two months to recover the money.ProjectB Year UNDISCCOUNTED FREE CASH FLOW PVIF * 11% , n REDUCED FREE CASH...... middle of paper .... ..so if Caledonia were to buy, it would not be able to sell after five years and make a profit. The building/factory may appreciate in value over time and may be more profitable to purchase. The cost of service and repairs should also be considered when trying to decide between leasing and buying. In many leases, the monthly payment includes the cost of any maintenance or repairs. Even though a purchase usually comes with a warranty, there can still be quite high costs. A lease typically does not require a down payment or may require a small deposit allowing the business to retain capital that could be used for other debts or purchases (Brandenburg, 2008). References Brandenburg, Jeff, 2008. Considerations on equipment rental versus purchase. Retrieved March 8, 2008 from online source: www.cliftoncpa.com/Content/NWNV44O1SO.pdf?Name=CoopNewsletterSummer06.pdf