Question

FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $202,800 per year. Once in​ production, the bike is expected to make $291,075 per year for 10 years. The cash inflows begin at the end of year 7.

For parts​ a-c, assume the cost of capital is 10.9%.

For parts​ d-f, assume the cost of capital is 14.1%.

a. Calculate the NPV of this investment opportunity.

If the cost of capital is 10.9%​, the NPV is $ ___ . (Round to the nearest​ dollar.)

Should the company make this​ investment?  ​(Select the best choice​ below.)

A. Accept the investment because the NPV is equal to or less than zero​ ($0).

B. Reject the investment because the NPV is less than zero ($0).

C. Accept the investment because the NPV is equal to or greater than zero ($0).

D. Reject the investment because the NPV is equal to or greater than zero​ ($0).

b. Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

The IRR is ___ ​%. (Round to two decimal​ places.)

If the cost of capital is 10.9%​, the maximum deviation is ___ ​%. (Round to two decimal​ places.)

c. How long must development last to change the​ decision?

For the decision to​ change, development must last ___ years, or longer. ​ (Round to two decimal​ places.)

d. Calculate the NPV of this investment opportunity. Should the company make the​ investment?

If the cost of capital is 14.1%​, the NPV is $ ___ . (Round to the nearest​ dollar.)

Should the company make the​ investment?  ​(Select the best choice​ below.)

A. Accept the investment because the NPV is equal to or greater than zero ($0)

B. Accept the investment because the NPV is equal to or less than zero​ ($0).

C. Reject the investment because the NPV is less than zero ($0).

D. Reject the investment because the NPV is equal to or greater than zero​ ($0).

e. How much must this cost of capital estimate deviate to change the​ decision?

The maximum deviation is __ ​%. (Round to two decimal​ places.)

f. How long must development last to change the​ decision?

For the decision to​ change, development must last no longer than __ years

Answer 1