QUESTION $1$

FastTrack$$ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $ $189$ comma $000$ per year. Once in$$ production, the bike is expected to make $ $283$ comma $500$ 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$$ decision? $($Hint$$: Use Excel to calculate the$$ IRR.$)$

c$.$ What is the NPV of the investment if the cost of capital is $13\%?$

Note$$: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year $7.$

QUESTION $2$

You own a coal mining company and are considering opening a new mine. The mine itself will cost $ $118$ million to open. If this money is spent$$ immediately, the mine will generate $ $21$ million for the next $10$ years. After$$ that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $ $1\mathrm{.}7$ million per year in perpetuity. What does the IRR rule say about whether you should accept this$$ opportunity?

$($Hint$$: Consider the number of sign changes in the cash$$ flows.$)$ If the cost of capital is $7\mathrm{.}9\%,$ what does the NPV rule$$ say?

Question content area bottom

Part $1$

What does the IRR rule say about whether you should accept this$$ opportunity? $($Select the best choice$$ below.$)$

A$.$

Reject the opportunity because the IRR is lower than the $7\mathrm{.}9\%$ cost of capital.

B$.$

There are two$$ IRRs, so you cannot use the IRR as a criterion for accepting the opportunity.

C$.$

Accept the opportunity because the IRR is greater than the cost of capital.

D$.$

The IRR is $11\mathrm{.}06\%,$ so accept the opportunity.

QYou are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $ $7$ comma $000$ and will be posted for one year. You expect that it will generate additional revenue of $ $840$ a month. What is the payback$$ period?

Question content area bottom

Part $1$

The payback period is

$$

enter your response here months. $($Round to two decimal$$ places.$)$

QUESTION $3$