ModernBikes (MB) projects sales for a new off-road bicycle:

Year Projected number of units sold

1 85.000

2 98.000

3 106.000

4 114.000

5 93.000

Operating net working capital is estimated to be 15% of the projected sales the following year. You

can assume that net working capital is fully recovered after 5 years. Total fixed costs are 900,000

per year, variable production costs are 240 per unit, and the estimated sales price is 325 per unit.

The investment cost is 20,000,000, which will be depreciated over five years using straight-line

depreciation. At the end of year 5, this equipment can be sold for 20% of its acquisition cost (before

tax). MB pays 35% in corporate taxes and uses 9% required rate of return on all its projects.

Based on these project estimates, what is the NPV of the project? What is the internal rate of return

for the project? Should MB implement the project?