FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Devel

Question

FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the costs is $213,900 per year. Once in production, the bike is expected to make $297,00 per year for 10 years. The cash inflows begin at the end of year 7. For parts A-C, assume 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? For parts d-f, assume the cost of capital is 14.3% d. Calculate the NPV of this investment opportunity. Should the company make the investment e. How much must this cost of capital estimate deviate to change the decision? f. How long must development last to change the decision?

Explanation / Answer

Ans a) Calculation of NPV Year Cash Flow PVAF 10.1% Net cash Flow 0 -213900 1 -213900 1 0 0.9083 0 2 0 0.8249 0 3 0 0.7493 0 4 0 0.6805 0 5 0 0.6181 0 6 0 0.5614 0 7 0 0.5099 0 8 29700 0.4631 13754.91 9 29700 0.4206 12493.11 10 29700 0.3821 11347.06 11 29700 0.3470 10306.14 12 29700 0.3152 9360.706 13 29700 0.2863 8502.004 14 29700 0.2600 7722.074 15 29700 0.2362 7013.692 16 29700 0.2145 6370.292 17 29700 0.1948 5785.915 NPV -121244 Since NPV is Negative therefore investment should not be made Ans b) Lets R=10% Year Cash Flow PVAF 10% Net cash Flow 0 -213900 1 -213900 1 0 0.9091 0 2 0 0.8264 0 3 0 0.7513 0 4 0 0.6830 0 5 0 0.6209 0 6 0 0.5645 0 7 0 0.5132 0 8 29700 0.4665 13855.27 9 29700 0.4241 12595.7 10 29700 0.3855 11450.64 11 29700 0.3505 10409.67 12 29700 0.3186 9463.335 13 29700 0.2897 8603.032 14 29700 0.2633 7820.938 15 29700 0.2394 7109.944 16 29700 0.2176 6463.585 17 29700 0.1978 5875.987 NPV -120252 Now, lets R =12% Year Cash Flow PVAF 12% Net Cash Flow 0 -213900 1 -213900 1 0 0.8929 0 2 0 0.7972 0 3 0 0.7118 0 4 0 0.6355 0 5 0 0.5674 0 6 0 0.5066 0 7 0 0.4523 0 8 29700 0.4039 11995.33 9 29700 0.3606 10710.12 10 29700 0.3220 9562.605 11 29700 0.2875 8538.04 12 29700 0.2567 7623.25 13 29700 0.2292 6806.473 14 29700 0.2046 6077.208 15 29700 0.1827 5426.079 16 29700 0.1631 4844.713 17 29700 0.1456 4325.637 NPV -137991 IRR= 10%-120252/-120252+137991(2%) IRR= -4%

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