The process of accurately determining which capital budgeting decisions would be the most advantageous for any company requires a multifaceted approach. Caledonia Products is no exception. There is no yardstick or measurement which can single-handedly predict which investments are the best in any given situation. However, there are several approaches that can be used together to provide guidelines for investment decisions in regards to Caledonia Products.
             In considering the introduction of the new product we discussed, Caledonia Products should focus on incremental after-tax free cash flows rather than accounting profits. The firm has the ability to immediately reinvest cash flows, whereas accounting profits are shown when they are earned rather than when the funds are actually received. Timing is an important aspect of capital budgeting decisions particularly when considering the introduction of a new product. One must determine what the cash flow would be with, as well as without the new project on order to determine whether the introduction of the project would be in the best interest of Caledonia Products.
             In determining cash flows for Caledonia Products it is important to be aware of which costs involve cash flow and which ones do not. For instance, depreciation represents a non-cash flow expense. When Caledonia purchases a fixed asset and expenses it over a period of time, it represents an expense, but not cash flow. It is important to know that although depreciation is a non-cash expense, it will still affect Caledonia's cash flow because it is tax deductible. Depreciation affects cash flow because it lowers accounting profits which, in turn, lowers taxes.
             Sunk costs are now viewed by many anti-trust scholars as the principal non-government source of entry barriers to new projects (Ross, 2004). As such, we might need to consider them in our decision making process. However, for our purposes today, sunk costs are costs ...