16-10B. (Analysis ofrecessionary cash flows) Seville Cranes, Inc., is undertaking a thorough cash flow analysis. It has been proposed by management that the firm expand by raising $6 million in the long-term debt markets. All of this would be immediately invested in new fixed assets. The proposed bond issue would carry a 10 percent interest rate and have a maturity period of 20 years. The bond issue would have a sinking fund provision that one-twentieth of the principal would be retired annually. Next year is expected to be a poor one for Seville. The firm's management feels, therefore, that the upcoming year would serve well as a model for the worst possible operating conditions that the firm can be expected to encounter. Seville ordinarily carries a

$750,000 cash balance. Next year sales collections are forecast to be $3.5 million. Miscellaneous cash receipts will total $200,000. Wages and salaries will amount to $1.2 million. Payments for raw materials used in the production process will be $1,500,000. In addition, the firm will pay

$500,000 in nondiscretionary expenditures including taxes. The firm faces a 50 percent tax rate.

a. Seville currently has no debt or preferred stock outstanding. What will be the total fixed financial charges that the firm must meet next year?

b. What is the expected cash balance at the end of the recessionary period (next year), assuming the debt is issued?

c. Based on this information, should Seville issue the proposed bonds?