Question
Pinder Ltd is considering investing $500,000 in a factory that will produce electric bicycles. Pinder Ltd has secured a contract with a major retailer who
Pinder Ltd is considering investing $500,000 in a factory that will produce electric bicycles. Pinder Ltd has secured a contract with a major retailer who has guaranteed that Pinder Ltd will receive $50 for each bicycle sold on top of all expenses related to production. This means that each year, the cash flows generated from producing bicycles will be $50 times the number of bicycles sold. In exchange for this guarantee, the retailer will take over the factory after 5 years at $200,000. Pinder Ltd expects to sell 7,000 bicycles each year for the next 5 years. Assume that Pinder Ltd's discount rate is 10%. How much does the number of bicycles sold need to fall before this project decreases the wealth of Pinder Ltd's shareholders?
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