Superfast Bikes is thinking of developing a new composite road bike. Development will require that the company pay a cost of $208,500 at the end of each year for the next 6 years. Once development of the bike has been completed 66 years from now, sales of the bike is expected to generate $296,102 of net cash inflow per year for the following 10 years. Assume that the cash inflows are received by the company at the end of each yearly sales period, with the first inflow arriving 7 years from today.

Assuming the cost of capital is 10.8% per annum:

a.  What  is the NPV of this investment opportunity?

 

 

b.  What is the IRR of this investment opportunity?
 

Assume that you have estimated that the correct cost of capital is 10.8%. Given the IRR you have calculated previously, by how much could your cost of capital estimate be "wrong" by without changing your overall decision about accepting or rejecting the project?