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A Company is considering an investment of $600,000 in a new motorcycle model. They expect to increase sales in each of the next three years by $400,000, while increasing expenses by $200,000 each year. They expect that they can carve out a niche in the marketplace for this new motorcycle for three years, after which they intend to cease production on this motorcycle and sell the manufacturing equipment for $200,000. Assume the equipment is depreciated at the rate of $200,000 each year with no salvage value. The company’s tax rate is 40%.
a. What are the net cash flows for each year of the motorcycle’s three-year life?
b. What is the net present value of the investment if the cost of capital is 10%?
c. What is the net present value of the motorcycle investment if the cost of capital is 5%?
d. What is the profitability index of this investment if the cost of capital is 5%? (inflow/investment)
e. What is the payback period of the investment?
f. What is the internal rate of return of the investment? (sum of cf/(1+r)?t)
g. If the cost of capital is 10%, should the company invest in this motorcycle?
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