FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $186,000 per year. Once in​ production, the bike is expected to make $260,400
per year for 10 years. Assume the cost of capital is 10%.
​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 the investment because the NPV is positive
.
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 14%​?
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.)