Question

FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost i$208,600

per year. Once in​ production, the bike is expected to make $286,796 per year for 10years. The cash inflows begin at the end of year 7.

For parts​ a-c, assume the cost of capital is 9.2%.

a. Calculate the NPV of this investment opportunity. (Round to the nearest​ dollar.)

Should the company make the​ investment?

b. Calculate the IRR and use it to

determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

c. How long must development last to change the​ decision?

For parts​ d-f, assume the cost of capital is14.1%.

d. Calculate the NPV of this investment opportunity. Should the company make the​ investment?

the NPV in this case is _____

e. How much must this cost of capital estimate deviate to change the​ decision?

  To change the​ decision, the deviation would need to be ____%.

f. How long must development last to change the​ decision? _____ years

Answer 1

1.
=-208600/9.2%*(1-1/1.092^6)+286796/1.092^7*(1-1/1.092^10)/(1-1/1.092)
=145760.45

2.
Yes

3.
-208600/IRR*(1-1/(1+IRR)^6)+286796/(1+IRR)^7*(1-1/(1+IRR)^10)/(1-1/(1+IRR))=0

IRR=11.3431%

Maximum deviation=11.3431%-9.2%=2.1431%

4.
-208600/9.2%*(1-1/1.092^n)+286796/1.092^(IRR+1)*(1-1/1.092^10)/(1-1/1.092)=0
=>n=6.707909 years

5.
=-208600/14.1%*(1-1/1.141^6)+286796/1.141^7*(1-1/1.141^10)/(1-1/1.141)
=-133633.47

6.
No

7.
-208600/IRR*(1-1/(1+IRR)^6)+286796/(1+IRR)^7*(1-1/(1+IRR)^10)/(1-1/(1+IRR))=0

IRR=11.3431%

Maximum deviation=14.1%-11.3431%=2.75690%

8.
-208600/14.1%*(1-1/1.141^n)+286796/1.141^(n+1)*(1-1/1.141^10)/(1-1/1.141)=0

=>n=5.282282