Question

FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $ 179,000 per year. Once in​ production, the bike is expected to make $ 268,500 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 13 %​? ​

Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.

Answer 1

		year	Cash flow	PVIF @ 10%	present value		PVIF @ 13%	present value
		1	-179,000	0.9091	(162,727.27)		0.8850	(158,407.08)
		2	-179,000	0.8264	(147,933.88)		0.7831	(140,183.26)
		3	-179,000	0.7513	(134,485.35)		0.6931	(124,055.98)
		4	-179,000	0.6830	(122,259.41)		0.6133	(109,784.05)
		5	-179,000	0.6209	(111,144.92)		0.5428	(97,154.03)
		6	-179,000	0.5645	(101,040.83)		0.4803	(85,977.02)
		7	268,500	0.5132	137,782.95		0.4251	114,128.78
		8	268,500	0.4665	125,257.23		0.3762	100,998.92
		9	268,500	0.4241	113,870.21		0.3329	89,379.58
		10	268,500	0.3855	103,518.37		0.2946	79,096.97
		11	268,500	0.3505	94,107.61		0.2607	69,997.32
		12	268,500	0.3186	85,552.37		0.2307	61,944.53
		13	268,500	0.2897	77,774.89		0.2042	54,818.17
		14	268,500	0.2633	70,704.44		0.1807	48,511.65
		15	268,500	0.2394	64,276.77		0.1599	42,930.67
		16	268,500	0.2176	58,433.42		0.1415	37,991.74
					151,686.61			(15,763.08)
Ans a
therefore NPV =			151,686.61
			since NPV is positive therefore project should be accepted
ans b
	IRR=	12.66%		=IRR(D3:D18,0)
	therefor if cost of capital is greater than 12.66% our decision will change.
ans c	NPV with 13% =		(15,763.08)	since NPV is negative project should be rejected