Check the correctness of the blue box "NPV", "Should they invest", "IRR", "Cost of capital increase", "NPV", "Should they invest"

Problem 7-6 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. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate increase to change the decision? What is the NPV of the investment if the cost of capital is 14%? Should the company make the investment? 10% $0 Cost of capital Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 -$200,000 -$200,000 -$200,000 -$200,000 -$200,000 -$200,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? NPV Should they invest? $169,482 Yes 1 b. By how much must the cost of capital estimate increase to change the decision? IRR Cost of capital increase 12.66% 2.66% c. What is the NPV of the investment if the cost of capital is 14%? Should the company make the investment? Cost of capital 14% NPV Should they invest? $64,816