Computing a hash value of a file
I think your overall approach is sound: read data into a buffer, update the hash, and repeat until the whole file has been processed.

Buffer size may have some impact on performance, so that may be worth experimenting with (I'd probably expose it as a parameter).

Having that said, there are a few odd things going on in your code:


Disposing algorithm is somewhat surprising - it's an argument, so I'd expect the calling code to be responsible for it. If anything, such behavior should be documented. You may also want to provide an overload that allows calling code to disable this - for example, StreamReader and StreamWriter have a constructor that takes a leaveOpen parameter.
Don't call Dispose when you're already using a using statement.
Successive using statements are usually not nested. Personally I think nesting them makes code a little less readable.
stream.Flush() isn't necessary because you're not writing to the stream.
Setting those local variables to null does nothing useful. It doesn't trigger the garbage collector, those variables will go out of scope shortly afterwards anyway, and since they're parameters they're also most likely not the only reference to the object they're referencing.
After removing those unnecessary lines, you can immediately return the result of algorithm.Hash.ToHex() - no need to store it in a local variable. If you do want to use a variable (to ease debugging or to improve readability of the code), then I would declare it as close to where it's used as possible. Currently, it appears at the top, middle and near the end of the method, so you have to look all over the place to see how it's used. That's no big deal for a small method like this, but it's not as easy to understand as it could be.