Explore BrainMass
Share

Explore BrainMass

    maximum deviation allowable

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com April 1, 2020, 4:31 pm ad1c9bdddf
    https://brainmass.com/economics/factors-of-production/251740

    Solution Summary

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

    $2.19