Fame Inc. is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project’s 3-year life, would have a zero-salvage value, and would require additional net operating working capital that would be recovered at the end of the project’s life. Annual sales revenues and operating costs are expected to be constant over the project’s life. You are required to determine the project’s cash flows. Would you recommend accepting this project? Justify your opinion.

WACC 10.0%

Net investment in fixed assets (basis) €75,000

Required net operating working capital €15,000

Straight-line depreciation rate 33.333%

Annual sales revenues €75,000

Annual operating costs (excl. depreciation) €25,000

Tax rate 35.0%

Answer rating: 100% (QA)

To determine whether Fame Inc should accept this investment project we need to calculate the projects cash flows and then evaluate its net present val... View the full answer