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.
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.)