EliteMotor, Inc. is a producer of mountain bikes. Its current line of non$-$folding mountain bikes are selling excellently. However, in order to cope with the foreseeable competition with other similar bikes, EliteMotor spent $$5,800,000$ to develop a new line of folding mountain bikes $($new model development cost$).$ The added convenience of portability of this new streamline $25$ speed $26"$ frame bike model enables users a great ride anywhere, not just on mountain trails. It is easy to install and great for students, office workers, urban environments, or any convenient commuting. EliteMotor will adjust the shifting and braking for this bike model and make its disc brakes automatically adaptable. Users can easily asjust the tension of the brake cable of the disc brake if they find the brakes not tight enough for themselves. Its frame is made of high carbon steel, with seat distance between $30$ inches and $34$ inches from the ground and handle $37$ inches also from the ground. The model works well for men and women of height between $5\text{'}3"-6\text{'}2"$ and weight of $220$ lb max. The company had also spent a further $$1,300,000$ to study the marketability of this new line of folding mountain bikes $($marketability studying cost$).$

EliteMotor is able to produce the new mountain bikes at a variable cost of $$50$ each. The total fixed costs for the operation are expected to be $$8,000,000$ per year. EliteMotor expects to sell $3,200,000$ bikes, $4,000,000$ bikes, $2,700,000$ bikes, $1,500,000$ bikes and $1,000,000$ bikes of the new model per year over the next five years respectively. The new bikes will be selling at a price of $$150$ each. To launch this new line of production, EliteMotor needs to invest $$33,000,000$ in equipment which will be depreciated on a seven$-$year MACRS schedule. The value of the used equipment is expected to be worth $$3,500,000$ as at the end of the $5$ year project life.

EliteMotor is planning to stop producing the existing mountain bikes entirely in two years. Should EliteMotor not introduce the new folding mountain bikes, sales per year of the existing non$-$folding mountain bikes will be $1,700,000$ bikes and $1,300,000$ bikes for the next two years respectively. The existing model can be produced at variable costs of $$40$ each and total fixed costs of $$7,500,000$ per year. The existing mountain bikes are selling for $$120$ each. If EliteMotor produces the new model, sales of existing model will be eroded by $1,020,000$ bikes for next year and $1,105,000$ bikes for the year after next. In addition, to promote sales of the existing model alongside with the new model, EliteMotor has to reduce the price of the existing model to $$70$ each. Net working capital for this new folding mountain bike project will be $25$ percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year $1$ according to the sales of the year. EliteMotor is currently in the tax bracket of $35$ percent and it requires a $15$ percent returns on all of its projects. The firm also requires a payback of $3$ years for all projects.

You have just been hired by EliteBike as a financial consultant to advise them on this new folding mountain bike project. You are expected to provide answers to the following questions to their management by their next meeting which is scheduled sometime next month.

What is$/$are the sunk cost$($s$)$ for this new folding mountain bike project? Briefly explain. You have to tell what sunk cost is and the amount of the total sunk cost$($s$).$ In addition, you have to advise EliteMotor on how to handle such cost$($s$).$

What are the cash flows of the project for each year?

What is the payback period of the project?

What is the PI $($profitability index$)$ of the project?

What is the IRR $($internal rate of return$)$ of the project?

What is the NPV $($net present value$)$ of the project?

Should the project be accepted based on Payback, PI$,$ IRR and NPV$?$ Briefly explain.