Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,805,000 in annual sales, with costs of $715,000. The tax rate is 24 percent and the required return on the project is 12 percent. What is the project’s NPV?
Net Present Value method (NPV) is a capital budgeting method used for finding the profitability of investment proposals. It measures the worthiness of the proposals which require long term capital investments. It is the difference between present value of cash inflow and the present value of cash outflows.
It can be calculated using the following equation:
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