York Bikes come up with a new mountain bike prototype and wishes to commence pilot production and test marketing. The pilot production and test marketing phase will last for 1 year and cost £708,701 now. Your management team believes that there is a 42% chance that the test marketing phase will be successful and that there will be sufficient demand for the new mountain bike. If the test marketing phase is successful then the firm can invest £3,500,000 in year 1 to build a plant that will generate expected annual after tax cash flows of £415,279 in perpetuity beginning in Year 2. If the test marketing phase is not successful then the firm can still go ahead and build a new plant, but the expected annual after tax cash flows would be only £300,000 in perpetuity beginning in Year 2. The firm has the option to sell the prototype mountain bike to a foreign competitor next year for £400,040. The firm’s cost of capital is 7.9% per annum. Compute the NPV of the project.
York Bikes come up with a new mountain bike prototype and wishes to commence pilot production and test marketing. The pilot production and test marketing phase will last for 1 year and cost £708,701 now. Your management team believes that there is a 42% chance that the test marketing phase will be successful and that there will be sufficient demand for the new mountain bike.
If the test marketing phase is successful then the firm can invest £3,500,000 in year 1 to build a plant that will generate expected annual after tax
The firm has the option to sell the prototype mountain bike to a foreign competitor next year for £400,040. The firm’s cost of capital is 7.9% per annum.
Compute the
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 6 images
