Question

FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $207,000 per year. Once in​ production, the bike is expected to make $331,200 per year for 10 years. Assume the cost of capital is 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 15%​?

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 $...............(Round to the nearest​ dollar.)

The present value of the benefits is $............. (Round to the nearest​ dollar.)

The net present value is $.............. (Round to the nearest​ dollar.)
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 ………​%. (Round to two decimal​ places.)

c. What is the NPV of the investment if the cost of capital is 15%​?

The present value of the costs is $.......... (Round to the nearest​ dollar.)

The present value of the benefits is $.......... (Round to the nearest​ dollar.)

The NPV will be $............ (Round to the nearest​ dollar.)

Answer 1

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