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# Operating cash flow for each year

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Hollister & Hollister is considering a new project. The project will require \$522,000 for new fixed assets, \$218,000 for additional inventory, and \$39,000 for additional accounts receivable. Short-term debt is expected to increase by \$165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. Their \$130,000 marketing study suggests that the project will generate annual sales of \$875,000 and costs of \$640,000. The tax rate is 34 percent and the required rate of return is 14 percent. What is the operating cash flow for each year?

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Finance
Hollister & Hollister is considering a new project. The project will require \$522,000 for new fixed assets, \$218,000 for additional inventory, and \$39,000 for additional accounts receivable. ...

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The solution helps in estimating operating cash flow for each year

\$2.19

## Incremental operating cash flow statements

Mini Case a-c Page 580

a. Set up, without numbers, a time line for the project's cash flows.

b. 1) Construct incremental operating cash flow statements for the project's 4 years of operations.

2) Does your cash flow statement include any financial flows such as interest expense or dividends? Why or why not?

c. 1) Suppose the firm had spent \$ 100,000 last year to rehabilitate the production line site. Should this cost be included in the analysis? Explain.

2) Now assume that the plant space could be leased out to another firm at \$25,000 a year. Should this be included in the analysis? If so, how?

3) Finally, assume that the new product line is expected to decrease sales of the firm's other lines by \$50,000 per year. Should this be considered in the analysis? If so, how?