FastTrackâ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $186,000 per year. Once inâ production, the bike is expected to make $260,400
per year for 10 years. Assume the cost of capital is 10%.
âNote: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
a. Calculate the NPV of this investmentâ opportunity, assuming all cash flows occur at the end of each year. Should the company make theâ investment?
The present value of the costs is $. (Round to the nearestâ dollar.)
The present value of the benefits is $. (Round to the nearestâ dollar.)
The net present value is $. (Round to the nearestâ dollar.)
â
You should
accept the investment because the NPV is positive
.
b. By how much must the cost of capital estimate deviate to change theâ decision? (Hint: Use Excel to calculate theâ IRR.)
To change theâ decision, the deviation would need to be . (Round to two decimalâ places.)
c. What is the NPV of the investment if the cost of capital is 14%â?
The present value of the costs is $. (Round to the nearestâ dollar.)
The present value of the benefits is $ (Round to the nearestâ dollar.)
The NPV will be $. (Round to the nearestâ dollar.)
FastTrackâ Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $186,000 per year. Once inâ production, the bike is expected to make $260,400
per year for 10 years. Assume the cost of capital is 10%.
âNote: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
a. Calculate the NPV of this investmentâ opportunity, assuming all cash flows occur at the end of each year. Should the company make theâ investment?
The present value of the costs is $. (Round to the nearestâ dollar.)
The present value of the benefits is $. (Round to the nearestâ dollar.)
The net present value is $. (Round to the nearestâ dollar.)
â
You should
accept the investment because the NPV is positive
.
b. By how much must the cost of capital estimate deviate to change theâ decision? (Hint: Use Excel to calculate theâ IRR.)
To change theâ decision, the deviation would need to be . (Round to two decimalâ places.)
c. What is the NPV of the investment if the cost of capital is 14%â?
The present value of the costs is $. (Round to the nearestâ dollar.)
The present value of the benefits is $ (Round to the nearestâ dollar.)
The NPV will be $. (Round to the nearestâ dollar.)
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Related questions
Your daughter is currently 6 years old. You anticipate that she will be going to college in 12 years. You would like to have $137,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 12% perâ year, how much money do you need to put into the account today to ensure that you will have $137,000 in 12 âyears?
Your deposit today should be
â$.
â (Round to the nearestâ dollar.)
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Suppose you receive $180 at the end of each year for the next three years.
a. If the interest rate is 7%â, what is the present value of these cashâ flows?
b. What is the future value in three years of the present value you computed in (aâ)?
c. Suppose you deposit the cash flows in a bank account that pays 7% interest per year. What is the balance in the account at the end of each of the next three yearsâ (after your deposit isâ made)? How does the final bank balance compare with your answer in â(bâ)?
a. If the interest rate is 7%â, what is the present value of these cashâ flows?
The present value of these cash flows is
â$ .
â (Round to the nearestâ cent.)
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You have just received a windfall from an investment you made in aâ friend's business. He will be paying you $31,004 at the end of thisâ year, $62,008 at the end of the followingâ year, and $93,012 at the end of the year after thatâ (three years fromâ today). The interest rate is 13.3% per year.
a. What is the present value of yourâ windfall?
b. What is the future value of your windfall in three yearsâ (on the date of the lastâ payment)?
a. What is the present value of yourâ windfall?
The present value of your windfall is
â$.
â (Round to the nearestâ dollar.)
