FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. Development will take 6 years and the cost is $ 208000 per year. Once in​ production, the bike is expected to make ​$332800 per year for 10 years. Assume the cost of capital is 9 %. Calculate the NPV of this investment​ opportunity, assuming all cash flows occur at the end of each year. Should the company make the​ investment?

To calculate the Net Present Value (NPV) of this investment opportunity, we can break the problem into two phases: the development phase (outflows) and the production phase (inflows). The formula for NPV is:

\[
\text{NPV} = \sum \left( \frac{C_t}{(1 + r)^t} \right) - C_0
\]
Where:
- $C_t$ = Cash flow at time $t$,
- $r$ = Discount rate (cost of capital),
- $t$ = Year of the cash flow,
- $C_0$ = Initial investment (if any, which in this case is spread over 6 years of development).

### Step 1: Calculate the present value of development costs (outflows)
The development phase costs $208,000 per year for 6 years. The present value (PV) of these outflows can be calculated as:

\[
\text{PV of outflows} = 208000 \times \sum \left( \frac{1}{(1 + 0.09)^t} \right) \text{ for } t = 1 \text{ to } 6
\]

### Step 2: Calculate the present value of production revenues (inflows)
The production phase earns $332,800 per year for 10 years, starting after the development period. The present value of these inflows starts in year 7. The formula to calculate the PV of these inflows is:

\[
\text{PV of inflows} = 332800 \times \sum \left( \frac{1}{(1 + 0.09)^t} \right) \text{ for } t = 7 \text{ to } 16
\]

### Step 3: Compute the total NPV
The NPV is the sum of the present value of inflows minus the present value of outflows.

Let me now calculate that.The Net Present Value (NPV) of this investment opportunity is approximately **$340,434.59**. Since the NPV is positive, FastTrack Bikes, Inc. should proceed with the investment, as it indicates the project is expected to add value to the company.

Would you like more details on the calculation or have any questions?

Here are 5 related questions to deepen your understanding:
1. How would the NPV change if the cost of capital increased to 12%?
2. What impact would extending the production phase by 5 more years have on the NPV?
3. How is the discount rate determined in real-world projects?
4. What does a negative NPV signify for an investment project?
5. How do you handle cases where cash flows occur at the beginning of the year instead of the end?

**Tip:** A positive NPV means that the investment should theoretically increase the company's value, but always consider other qualitative factors such as risk and market trends.

FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take 6 years and the cost is $208,000 per year. Once in production, the bike is expected to make $332,800 per year for 10 years. Assume the cost of capital is 9%. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment?

Learn how to calculate the Net Present Value (NPV) of an investment opportunity for FastTrack Bikes, Inc. using a 9% discount rate. This problem breaks down cash flow analysis, present value, and how to evaluate whether the company should proceed with the investment. Perfect for undergraduate finance students.

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