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It’s been two months since you took a position as an assistant financial analyst at Caledonia Products.  Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision.  Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects.  Given your lack of tenure at Caledonia, you have been asked not only to provide a recommendation, but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process.  The memorandum you received outlining your assignment follows:

To: The Assistant Financial Analyst

From: Mr. V. Morrison, CEO, Caledonia Products

Re: Cash Flow Analysis and Capital Rationing

We are considering the introduction of a new product.  Currently we are in the 34% tax bracket with a 15% discount rate.  This project is expected to last five years and then, because this is somewhat of a fad project, it will be terminated.  The following information describes the new project:

                 Cost of new plant & equipment:  $7,900,000

                 Shipping & installation costs:      $  100,000

                 Unit sales:

                           Year  Units Sold

                             1         70,000

                             2       120,000

                             3       140,000

                             4         80,000

                             5         60,000

               Sales price per unit  :     $300/unit in years 1-4 &

                                                         $260/unit in year 5.

               Variable cost per unit  :  $180/unit

               Annual Fixed costs    :    $200,000 per year

Working capital requirements: There will be an initial working capital requirement of $100,000 just to get production started.  For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year.  Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4.  Finally, all working capital is liquidated at the termination of the project at the end of year 5.

Depreciation method: Straight-line over 5 years assuming the plant and equipment have no salvage value after 5 years.

==============================================================================

Prepare a response to the Caledonia Products Mini-Case as follows: (PLEASE REFER TO CHAPTER 12 FOR REFERENCE & INFO): 

CHAP 12 – ANALYZING PROJECT CASH FLOWS 

1. Introduction in general

2. Why should Caledonia focus on project free cash flows as opposed to be accounting profits earned by the project when analyzing whether to undertake the project?

3. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?

4. Please include references.

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In those states with the three strikes laws, any person who has 2 felony strikes and commits another felony, whether it be violent or not, can be required to serve a sentence of 25 years to life.

Look at the case of Ewing v. California: Ewing v. California

Click on the PDF link next to the case title.

The defendant had his third strike when he committed grand theft at a golf course in Los Angeles County. This was not a violent crime but he was subject to the three strikes laws. He appealed this case up to the United States Supreme Court—and lost.

The public has always been worried about violent crime, but just how worried are citizens about nonviolent crime? With mandatory sentencing, society will have many older inmates within the prison system. In the criminal justice community, it is known that inmates “age out of crime.” Can you imagine a 68-year-old man climbing in a window or jumping an 8-foot fence? By keeping these older inmates incarcerated, is this a disservice to society?

State prosecutors have the discretion to lower the charge so that the third offense would not be considered a third strike. For this assignment, you are a policy maker in your state legislature. You are concerned about the heavy tax burden on your constituents. The cost of the actual running of the prison and costs of personnel will rise.

You are also up for re-election, and the feedback that you have received from your constituents has shown that they are dissatisfied with the law that now stands. They are afraid of violent crimes, not just felonies, and are very aware that the last crime committed by the perpetrator does not have to be a violent crime. They are also worried about the use of their tax dollars to incarcerate nonviolent offenders.

Assignment Guidelines

Address the following in 5–7 pages:

Develop a policy regarding the three strikes laws in the State of California.

Address the following in your policy:

What alternatives would be placed in the law to give the state prosecutor more freedom to manipulate the third strike?

Many prosecutors “load up” charges against defendants to force a plea bargain.

What can be done to limit or prevent this practice?

Will your policy allow multiple counts arising from the same incident to count as multiple strikes? (For instance, a man arrested for aggravated robbery because of the use of a weapon is charged with aggravated robbery and a felony gun possession charge. Should that count as 1 strike or 2?)

If one of the alternatives was supervised probation, how would you convince the public that it would be more cost-effective for the person to be supervised than incarcerated?

Show the public where you would be saving money by not incarcerating the perpetrator.If brought up in the legislature to be an amendment to the law, could this be grandfathered in to help older inmates?

Could this have a backlash from the public, or would they approve? How? Why?

Once you are finished with the policy, draft an executive summary of the policy to be used for political decision making.

Use 6–10 scholarly resources to support the provisions of your policy.

Dictionaries and encyclopedias are not scholarly sources.

Look at federal and state legislation and court cases.

Be sure to reference all sources using APA style.

 

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