Question

FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000

per year. Once in​ production, the bike is expected to make $300,000

per year for 10

years. The cash inflows begin at the end of year 7.For parts​ a-c, assume the cost of capital is 10.0%.

a. Calculate the NPV of this investment opportunity. 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 is 14.0 %

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

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

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

a. Calculate the NPV of this investment opportunity.

If the cost of capital is 10.0 %

the NPV is ______________ ​ (Round to the nearest​ dollar.)

Should the company make this​ investment?  ​(Select the best choice​ below.)

A.

Reject the investment because the NPV is less than zero left $ 0 .Reject the investment because the NPV is less than zero ($0).

B.

Accept the investment because the NPV is equal to or less than zero​ ($0).

C.

Accept the investment because the NPV is equal to or greater than zero $ 0 .Accept the investment because the NPV is equal to or greater than zero ($0).

D.

Reject the investment because the NPV is equal to or greater than zero​ ($0).

b. Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

The IRR is nothing​

​(Round to two decimal​ places.

If the cost of capital is 10.0 % the maximum deviation is nothing​

​(Round to two decimal​ places.)

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

For the decision to​ change, development must last

nothing

​years, or longer. ​ (Round to two decimal​ places.)

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

If the cost of capital is 14.0 % the NPV is

​$nothing.

​(Round to the nearest​ dollar.)

Should the company make the​ investment?  ​(Select the best choice​ below.)

A.

Reject the investment because the NPV is less than zero left parenthesis $ 0 right parenthesis .Reject the investment because the NPV is less than zero ($0).

B.

Reject the investment because the NPV is equal to or greater than zero​ ($0).

C.

Accept the investment because the NPV is equal to or greater than zero left parenthesis $ 0 right parenthesis .Accept the investment because the NPV is equal to or greater than zero ($0).

D.

Accept the investment because the NPV is equal to or less than zero​ ($0).

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

The maximum deviation is

nothing​%.

​(Round to two decimal​ places.)

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

For the decision to​ change, development must last no longer than

nothing

years.  ​(Round to two decimal​ places.)

Answer 1