FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take 3...

FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take 3 years and the cost is $110.000 per year. Once in production, the bike is expected to make $95.000 per year for 6 years. Assume the cost of capital is 6%. 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. What is the NPV of the investment if the cost of capital is 14%?

Solutions

Expert Solution

If the cost of capital is 6%, then NPV is $98193.3164, which is positive or greater than zero, so company should make the investment.

The explanation of calculation is provided below in the excel worksheet:-

Following is the formula sheet of above excel worksheet for easy understanding:-

Part (b):-

If the cost of capital is 14%, then NPV is - $6029.2411, which is negative or less than zero, so company should not make the investment.

Following is the formula sheet of above excel worksheet for easy understanding:-

jeff jeffy answered 1 year ago

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