Question

FastTrack? Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $ 200 comma 000 $200,000 per year. Once in? production, the bike is expected to make $ 300 comma 000 $300,000 per year for 10 10 years. Assume the cost of capital is 10 % 10%. a. Calculate the NPV of this investment? opportunity, assuming all cash flows occur at the end of each year. Should the company make the? investment? b. By how much must the cost of capital estimate deviate to change the? decision?? (Hint: Use Excel to calculate the? IRR.) c. What is the NPV of the investment if the cost of capital is 14 % 14%?? ?Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7. a. Calculate the NPV of this investment? opportunity, assuming all cash flows occur at the end of each year. Should the company make the? investment? The present value of the costs is ?$ nothing . ? (Round to the nearest? dollar.) The present value of the benefits is ?$ nothing . ?(Round to the nearest? dollar.) The net present value is ?$ nothing . ?(Round to the nearest? dollar.) ?(Select from the? drop-down menus.) You should ? accept reject the investment because the NPV is ? positive negative . b. By how much must the cost of capital estimate deviate to change the? decision? (Hint: Use Excel to calculate the? IRR.) To change the? decision, the deviation would need to be nothing ?%. ? (Round to two decimal? places.) c. What is the NPV of the investment if the cost of capital is 14 % 14%?? The present value of the costs is ?$ nothing . ?(Round to the nearest? dollar.) The present value of the benefits is ?$ nothing . ? (Round to the nearest? dollar.) The NPV will be ?$ nothing . ? (Round to the nearest? dollar.) Enter your answer in each of the answer boxes.

Answer 1

Ans A)

	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Cost	-200000	-200000	-200000	-200000	-200000	-200000
Benefit							300000	300000	300000	300000	300000	300000	300000	300000	300000	300000
Presnt value of Cost	-181818	-165289	-150263	-136603	-124184	-112895
Presnet Valus of Benefits	0	0	0	0	0	0	153947.4	139952.2	127229.3	115663	105148.2	95589.25	86899.31	78999.38	71817.61	65288.74
Prensent Value of Cost	-871052
Presnet Value of Benefits	1040534
NPV	169482.2

Since the NPV is positive company should invest in this opportunity.

Ans b)

	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Cost	-200000	-200000	-200000	-200000	-200000	-200000
Benefit							300000	300000	300000	300000	300000	300000	300000	300000	300000	300000
Presnt value of Cost	-177526	-157578	-139871	-124154	-110203	-97820
Presnet Valus of Benefits	0	0	0	0	0	0	130242.3	115607.2	102616.6	91085.82	80850.69	71765.66	63701.5	56543.49	50189.81	44550.08
Prensent Value of Cost	-807154
Presnet Value of Benefits	807153.1
NPV	-0.41816
IRR	12.6593%

Ans c)

	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Cost	-200000	-200000	-200000	-200000	-200000	-200000
Benefit							300000	300000	300000	300000	300000	300000	300000	300000	300000	300000
Presnt value of Cost	-175439	-153894	-134994	-118416	-103874	-91117.3
Presnet Valus of Benefits	0	0	0	0	0	0	119891.2	105167.7	92252.38	80923.14	70985.21	62267.73	54620.82	47913	42028.94	36867.5
Prensent Value of Cost	-777734
Presnet Value of Benefits	712917.6
NPV	-64815.9