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28 Sep 2019
FastTrackâ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $204,000 per year. Once inâ production, the bike is expected to make $306,000
per year for 10 years. Assume the cost of capital is 10%.
a. Calculate the NPV of this investmentâ opportunity, assuming all cash flows occur at the end of each year. Should the company make theâ investment?
b. By how much must the cost of capital estimate deviate to change theâ decision?â (Hint: Use Excel to calculate theâ IRR.)
c. What is the NPV of the investment if the cost of capital is 13%â?
âNote: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
FastTrackâ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $204,000 per year. Once inâ production, the bike is expected to make $306,000
per year for 10 years. Assume the cost of capital is 10%.
a. Calculate the NPV of this investmentâ opportunity, assuming all cash flows occur at the end of each year. Should the company make theâ investment?
b. By how much must the cost of capital estimate deviate to change theâ decision?â (Hint: Use Excel to calculate theâ IRR.)
c. What is the NPV of the investment if the cost of capital is 13%â?
âNote: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
Beverley SmithLv2
28 Sep 2019
