Question

FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six...

FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $201,800 per year. Once in​ production, the bike is expected to make $299,260 per year for 10 years. The cash inflows begin at the end of year 7.For parts​ a-b, assume the cost of capital is 9.2%.

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. For part​ c, assume the cost of capital is 14.1%.

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

a. Calculate the NPV of this investment opportunity.

If the cost of capital is 9.2%​, 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 ($0).

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

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

D. Accept 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 ____​%.(Round to two decimal​ places.)

If the cost of capital is 9.2%​, the maximum deviation is ____%. (Round to two decimal​ places.)

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

If the cost of capital is 14.1%​, the NPV is ​$____. (Round to the nearest​ dollar.)

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

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

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

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

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

Homework Answers

Answer #1

1.
If the cost of capital is 9.2%​, the NPV is ​
=-201800/9.2%*(1-1/1.092^6)+299260/9.2%*(1-1/1.092^10)*1/1.092^6
=222844.7101

2.
Should the company make this​ investment? 
Accept the investment because the NPV is equal to or greater than zero ($0)

3.
The IRR is

-201800/x*(1-1/(1+x)^6)+299260/x*(1-1/(1+x)^10)*1/(1+x)^6=0

=>IRR=x=12.4851%

4.
If the cost of capital is 9.2%​, the maximum deviation is

Maximum deviation=12.4851%-9.2%=3.2851%

3.
If the cost of capital is 14.1%​, the NPV is

=-201800/14.1%*(1-1/1.141^6)+299260/14.1%*(1-1/1.141^10)*1/1.141^6
=-77913.4731

4.
Reject the investment because the NPV is less than zero ($0)

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