Question

VFIC Industries has come up with a new mountain bike prototype and is ready to go...

VFIC Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will cost $100,000 and last for one year. The management team believes that there is a 30% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then VFIC will invest $2 million to build a plant immediately that will generate expected annual after-tax cash flows of $300,000 in perpetuity starting in year two. If the test marketing is not successful, VFIC can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $150,000 in perpetuity starting in year two. VFIC's cost of capital is 10%.

What is the NPV of the VFIC Mountain Bike Project?

A.

$90,909

B.

$172,727

C.

$455,000

D.

-$45,455

E.

None of the above

Homework Answers

Answer #1

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