Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 7, Problem 6P
FastTrack 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. Assume the cost of capital is 10%.
- a. Calculate the
NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? - b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the
IRR .) - c. What Is the NPV of the Investment if the cost of capital is 14%?
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FastTrack 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. Assume the cost of capital is 10%.
a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment?
b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.)
c. What is the NPV of the investment if the cost of capital is 14%?
Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
FastTrack 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. Assume the cost of capital is 10%.
a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment?
b. By how much must the cost of capital estimate deviate to change the decision?
(Hint:
Use Excel to calculate the IRR.)
c. What is the NPV of the investment if the cost of capital is
14%?
Note:
Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $198,000 per year. Once in production, the bike is expected to make $316,800 per year for 10 years. Assume the cost of capital is 10%.
Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? (Round to the nearestdollar.)
By how much must the cost of capital estimate deviate to change the decision?
(Hint: Use Excel to calculate the IRR.)
3. What is the NPV of the investment if the cost of capital is 15%?
Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
Chapter 7 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
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