Question
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.
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. The cash inflows begin at the end of year 7. Assume the cost of capital is 10.0% for parts (a), (b), and (c) below. a. Calculate the NPV of this investment opportunity. Should the company make the investment? b. Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. c. With costs remaining at $200,000 per year, how long must development last to change the decision? Assume the cost of capital is 14.0% for parts (d), (e), and (f) below. d. Calculate the NPV of this investment opportunity. Should the company make the investment? e. How much must this cost of capital estimate deviate to change the decision? f. With costs remaining at $200,000 per year, how long must development last to change the decision?
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