FastTrack Bikes, Inc., is thinking of developing a new composite road bike. Development will take six years
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. Once in production, the bike is expected to make $300,000 per year for ten years. The cash inflows begin at the end of year 7. Assuming the cost of capital is 10%:
1.
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. How long must development last to change the decision? Assuming the cost of capital is 14%:
2.
a. Calculate the NPV of this investment opportunity. Should the company make the investment?
b. How much must this cost of capital estimate deviate to change the decision?
c. How long must development last to change the decision?
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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