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

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Finance

FastTrack? Bikes, Inc. is thinking of developing a new compositeroad 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, assumingall cash flows occur at the end of each year. Should the companymake the? investment?

b. By how much must the cost of capital estimate deviate tochange the? decision?? (Hint: Use Excel to calculate the? IRR.)

c. What is the NPV of the investment if the cost of capital is13 %?? ?

Note: Assume that all cash flows occur at the end of theappropriate year and that the inflows do not start until year7.

Answer & Explanation Solved by verified expert
4.2 Ratings (878 Votes)
yearCashflowPVIF 10presentvaluePVIF 13presentvalue1179000 09091 16272727 08850158407082179000 08264 14793388 07831140183263179000 07513 13448535 06931124055984179000 06830    See Answer
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Transcribed Image Text

FastTrack? Bikes, Inc. is thinking of developing a new compositeroad 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, assumingall cash flows occur at the end of each year. Should the companymake the? investment?b. By how much must the cost of capital estimate deviate tochange the? decision?? (Hint: Use Excel to calculate the? IRR.)c. What is the NPV of the investment if the cost of capital is13 %?? ?Note: Assume that all cash flows occur at the end of theappropriate year and that the inflows do not start until year7.

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