Fast Bikes Ltd is a small manufacturer planning to start arevolutionary line of battery operated bikes.

To start the project, the firm needs to purchase manufacturingequipment worth $ 10 million today and also incur an additional $ 2million in research and development costs.

The equipment will be depreciated in equal amounts over the next10 years.

In the first year, the firm expects to sell 100 bikess at $25,000 each and the manufacturing cost is estimated to be $ 15,000per bike.

As demand rises and processes are streamlined, the firm expectsrevenues to grow by 8% each year for the first 10 years and remainconstant from the 11^th year onwards into the indefinitefuture

Over the same period, cost of manufacturing is expected to riseby only 3% per year and stabilize from the 11^th yearonwards.

To guard against contingencies, the firm needs to set aside $ 2million at the start of the project. However, as the projectdevelops, the contingency amount can be reducedby             $ 200,000 each year.

From the 11^th year onwards, the firm does notenvisage buying or selling off any additional equipment orincurring any costs beyond the cost of manufacturing the cars.

To fund the project the firm borrows $ 5 million from the bankwhich charges an interest rate of 4%. The loan will need to berepaid in equal-sized annual instalments over 10 years, starting inYear 1.

The rest of the funding comes from shareholders who expect an10% return on their investment.

The corporate tax rate is 40% and expected to remainconstant.

a) Using this data, work out the free cash flow of the projectfrom year 0 to year 10 on an Excel spreadsheet. Clearly highlightall relevant inputs, adjustments and formulae for yourcalculation.           

b) Calculate the NPV of the project  

Note: The project doesn’t terminate in 10 years but continuesinto the indefinite future