This week's case study is to determine the cash flows of a project based on a set of assumptions. Your deliverable should be the cash flow detail and an explanation of how you arrived at your numbers. This can be done in spreadsheet format with formulas, or in narrative with exhibits. I am not concerned with page count or the actual writing, but more so with your process to find the cash flows.

Case Study $-$ Week $7$

You will use the results from this case study to complete the case study in week $8.$

Project Cash Flows

Your company, Dawgs $"$R$"$ Us$,$ is evaluating a new project involving the purchase of a new oven to bake your hotdog buns. If purchased, the new oven will replace your existing oven, which was purchased seven years ago for a total installed price of $$1$ million.

You have been depreciating the old oven on a straight$-$line basis over its expected life of $15$ years to an ending book value of $$250,000,$ even though you expect it to be worthless at the end of that $15-$year period. The new oven will cost $$2$ million and will fall into the MACRS five$-$year depreciation class life. If you purchase the new oven, you expect it to last for eight years. At the end of those eight years, you expect to be able to sell it for $$100,000.($Note that both ovens, old and new, therefore have an effective remaining life of eight years at the time of your analysis.$)$ If you do purchase the new oven, you estimate that you can sell the old one for its current book value at the same time.

The advantages of the new oven are twofold: Not only do you expect it to reduce the before$-$tax costs on your current baking operations by $$75,000$ per year, but you will also be able to produce new types of buns. The sales of the new buns are expected to bring your company $$200,000$ per year throughout the eight$-$year life of the new oven, while associated costs of the new buns are only expected to be $$80,000$ per year.

Since the new oven will allow you to sell these new products, you anticipate that NWC will have to increase immediately by $$20,000$ upon purchase of the new oven. It will then remain at that increased level throughout the life of the new oven to sustain the new, higher level of operations.

Your company uses a required rate of return of $12$ percent for such projects, and your incremental tax rate is $34$ percent. What will be the total cash flows for this project? Please be sure to show your operating cash flows and discuss your investments in operating capital $($change in fixed assets and net working capital$).$ A table or spreadsheet will help to present this in a clear, orderly fashion.