The Sopchoppy Motorcycle Company is considering an investment of

$600,000 in a new motorcycle. They expect to increase sales in each of the next three years by $400,000, while increasing expenses by $200,000 each year. They expect that they can carve out a niche in the marketplace for this new motorcycle for three years, after which they intend to cease production on this motorcycle. Assume the equipment is depreciated at the rate of $200,000 each year. Sopchoppy’s tax rate is 40%.

a. What is the internal rate of return of this project if they sell the manufacturing equipment for $200,000 at the end of three years?

b. What is the internal rate of return of this project if they sell the manufacturing equipment for $100,000 at the end of three years?

c. What is the internal rate of return of this project if they sell the manufacturing equipment for $300,000 at the end of three years?

d. Suppose the following distribution of possible sales prices on the equipment is developed:What is the expected internal rate of return for Sopchoppy? What is the standard deviation of these possible internal rates of return?

Transcribed Image Text:

Sales Price Probability $100,000 25% $200,000 50% $300,000 25%