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How much must cost of capital estimate deviate to change

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FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $210,300 per year. Once in production, the bike is expected to make $292,116 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 9.6%.

Question 1: Calculate the NPV of this investment opportunity. Should the company make the investment?

Question 2: Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

Question 3: How long must development last to change the decision?

For parts d-f, assume the cost of capital is 13.8%.

Question 4: Calculate the NPV of this investment opportunity. Should the company make the investment?

Question 5:  How much must this cost of capital estimate deviate to change the decision?

Question 6: How long must development last to change the decision?

Reference no: EM132908897

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