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FastTrack Bikes, Inc
FastTrack Bikes, Inc., is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make $300,000 per year for 10 years. The cash inflows begin at the end of year 7. Assuming the cost of capital is 10%, Calculate the NPV of this investment opportunity. Should the company make the investment?
Expert Solution
Present value of cash outflows = Annuity * [1 - 1 / (1 + rate)^periods] / rate
Present value of cash outflows = -200,000 * [1 - 1 / (1 + 0.1)^6] / 0.1
Present value of cash outflows = -200,000 * [1 - 0.56447] / 0.1
Present value of cash outflows = -200,000 * 4.35526
Present value of cash outflows = -871,052.1399
Value of cash inflows in year 6 = Annuity * [1 - 1 / (1 + rate)^periods] / rate
Value of cash inflows in year 6 = 300,000 * [1 - 1 / (1 + 0.1)^10] / 0.1
Value of cash inflows in year 6 = 300,000 * [1 - 0.38554] / 0.1
Value of cash inflows in year 6 = 300,000 * 6.14457
Value of cash inflows in year 6 = 1,843,370.132
Value of cash inflows today = Future value / (1 + rate)^periods
Value of cash inflows today = 1,843,370.132 / (1 + 0.1)^6
Value of cash inflows today = 1,843,370.132 / 1.77156
Value of cash inflows today = $1,040,534.97
NPV = Present value of cash inflows - present value of cash outflows
NPV = 1,040,534.97 - 871,052.1399
NPV = $169,482.24
Company should make the investment since NPV is positive.g
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