Question
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. The development will take six years and the cost is $201,000 per year.
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. The development will take six years and the cost is $201,000 per year. Once in production, the bike is expected to make $281,400 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 deviate to change the decision?
c. What is the NPV of the investment if the cost of capital is 15%?
Note:
Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
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