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Case Study Essay

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Case #82
Prairie Winds Pasta – Capital Budgeting Methods & Cash Flow Estimation

Summary of Case

Prairie Winds Pasta is experiencing a high demand for pasta from its customers. The customers demand delivery with in one week with a maximum allowance of 10 days. The facility is running at full capacity - 24 hours a day.

Question 1
Define the term “incremental cash flow.” Since the project will be financed in part by debt, should the cash flow statement include interest expense? Explain.
Response:

Incremental cash flows is the difference between the cash flows a company will have if it implements the new project versus the cash flows the company will have if they choose not to embark
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When a company’s product lines compete with one another this is called cannibalization. The cost of cannibalization should be included in estimating the new product’s cash flows.
The decision to forgo the production of the cheaper product should also be evaluated in a capital investment cash flow analysis. The management of Prairie Winds will need to consider whether the internal and external side effects of their decisions in the capital budgeting analysis for the product lines. If the side effects increase cash flows of existing assets they are considered compliments, and they are considered substitutes if the side effects negatively effect cash flows.

Question 5
What are the expected non-operating cash flows when the project is terminated in Year 10?
Response:

In order to arrive at the non-operating cash flows in year 10, we must add together the net cash flows from investing and financing activities. The non-operating cash flow when the project is terminated in year 10 is $902,000.

Question 6
Estimate the project’s operating cash flows for each year of the project’s economic life. (Hint: Use Table 2 as a guide)
Response:

Expected Operating Cash Flow

|Year 1 |$10,540,440 |
|Year 2 |$12,316,500 |
|Year 3 |$11,024,820 |
|Year 4 |$10,378,980 |
|Year
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