Superfast Bikes is thinking of developing a new composite road bike. Development will take six years and the cost is $208 500 per year. Once in production, the bike is expected to make $296 102 per year for 10 years. The cash inflows begin at the end of year 7.
Assuming the cost of capital is 9.8%:
a. Calculate the NPV of this investment opportunity. Should the company make the investment?
b. Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
c. How long must development last to change the decision?

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