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Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.29 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 $1,810,000 in annual sales, with costs of $720,000. The tax rate is 25 percent and the required return on the project is 13 percent. What is the project’s NPV? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, and round your answer to 2 decimal places, e.g., 1,234,567.89.)

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Expert Solution

Computation of NPV
Year 0 1 2 3 4
A Initial investment -2290000
Operating cash flow
sales 1,810,000 1,810,000 1,810,000 1,810,000
Cost 720,000 720,000 720,000 720,000
Depreciation 572500 572500 572500 572500
Profit before tax 517,500 517,500 517,500 517,500
Tax on profit @ 25% 129375 129375 129375 129375
Net income 388,125 388,125 388,125 388,125
B Operating cash flow 960,625 960,625 960,625 960,625
C=A+B Net cash flow -2290000 960625 960625 960625 960625
D PVIF @ 13% 1 0.884955752 0.783146683 0.693050162 0.613318728
E=C*D Present value $ (2,290,000.00) $         850,110.62 $ 752,310.28 $    665,761.31 $    589,169.30 $ 567,351.52
NPV = $       567,351.52

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