maximum deviation allowable
Fast Track 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.
a. Assume the cost of capital is 10%.
i. Calculate the NPV of this investment opportunity. Should
the company make the investment?
ii. Calculate the IRR and use it to determine the maximum
deviation allowable in the cost of capital estimate to leave the decision
unchanged.
iii. How long must development last to change the decision?
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