FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Devel
ID: 2782001 • Letter: F
Question
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $196,900 per year. Once in production, the bike is expected to make $287,917 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 9.9%. 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 13.4 % 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
USING BAII PLUS CALCULATOR
a.&b. Calculation of NPV & IRR
Go in cash flow mode
C0= -196900
C1= -196900, F= 05
C2=0
C3= 287917, F= 10
I= 9.9
CPT NPV
NPV= $ 63200.87( Project is viable, we should develop the new composite road bike)
IRR CPT
IRR= 10.74%
Therefore maximum deviation from cost of capital= (10.74-9.9)= 0.84%
c.Till NPV is POSITIVE , We cannot change our decision of developing a new composite road bike.
d&e.
Calculation of NPV & IRR
Go in cash flow mode
C0= -196900
C1= -196900, F= 05
C2=0
C3= 287917, F= 10
I= 13.4
CPT NPV
NPV= -$159670.08 ( project is not viable, we should develop the new composite road bike)
IRR CPT
IRR= 10.74%
Therefore maximum deviation from cost of capital= (10.74-13.4)= -2.66%
f.Till NPV is Negetive , we cannot change our decision to not develop the new composite road bike.
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