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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?

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.

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