PLEASE ANSWER IT CLEARLY. THANK YOU. FastTrack? Bikes, Inc. is thinking of devel

Question

PLEASE ANSWER IT CLEARLY. THANK YOU.

FastTrack? Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $197,000 per year. Once in? production, the bike is expected to make $295,500 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 15%?? ?Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.

Explanation / Answer

Answer a Answer c Calculation of NPV Calculation of NPV Year Cash flows Discount factor @ 10% Present Values Year Cash flows Discount factor @ 15% Present Values 1 -$197,000.00 0.909091 -$179,090.91 1 -$197,000.00 0.869565 -$171,304.35 2 -$197,000.00 0.826446 -$162,809.92 2 -$197,000.00 0.756144 -$148,960.30 3 -$197,000.00 0.751315 -$148,009.02 3 -$197,000.00 0.657516 -$129,530.70 4 -$197,000.00 0.683013 -$134,553.65 4 -$197,000.00 0.571753 -$112,635.39 5 -$197,000.00 0.620921 -$122,321.50 5 -$197,000.00 0.497177 -$97,943.82 6 -$197,000.00 0.564474 -$111,201.36 6 -$197,000.00 0.432328 -$85,168.54 7 $295,500.00 0.513158 $151,638.22 7 $295,500.00 0.375937 $111,089.40 8 $295,500.00 0.466507 $137,852.93 8 $295,500.00 0.326902 $96,599.47 9 $295,500.00 0.424098 $125,320.85 9 $295,500.00 0.284262 $83,999.54 10 $295,500.00 0.385543 $113,928.04 10 $295,500.00 0.247185 $73,043.08 11 $295,500.00 0.350494 $103,570.95 11 $295,500.00 0.214943 $63,515.72 12 $295,500.00 0.318631 $94,155.41 12 $295,500.00 0.186907 $55,231.06 13 $295,500.00 0.289664 $85,595.82 13 $295,500.00 0.162528 $48,027.01 14 $295,500.00 0.263331 $77,814.39 14 $295,500.00 0.141329 $41,762.62 15 $295,500.00 0.239392 $70,740.35 15 $295,500.00 0.122894 $36,315.32 16 $295,500.00 0.217629 $64,309.41 16 $295,500.00 0.106865 $31,578.54 NPV $166,940.01 NPV -$104,381.32 Yes , company should make investment as NPV is positive. Answer b Calculation of IRR of the project IRR = 12.66% The cost of capital estimate deviate between 10% to 12.66% to change the decision.

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