FastTrack Bikes, Inc. is thinking of developing a new compositeroad bike. Development will take six years and the cost is $200,000per year. Once in production, the bike is expected to make $300,000(after expenses) per year for 10 years. The cash inflows begin atthe end of year 7.

At FastTrack, there is a difference of opinion as to the \"best\"decision rule to use. The four rules under consideration are NPV,IRR, Payback Period and Profitability Index(PI).                         

Additional Info: The firm's president has set a maximumacceptable payback period of 8 years for projects and the cost ofcapital appropriate for this project is 10%.

Using the end of year cash flows as shown in the table (seebelow), answer each of the following:

Year	Cash Flows
0	$0
1	-$200,000
2	-$200,000
3	-$200,000
4	-$200,000
5	-$200,000
6	-$200,000
7	$300,000
8	$300,000
9	$300,000
10	$300,000
11	$300,000
12	$300,000
13	$300,000
14	$300,000
15	$300,000
16	$300,000

1a        What is the NPV ofthe project if the firm's cost of capital is 10%?

1b        Should the projectbe accepted or rejected based on NPV and why?

Note that while at first you may think that IRR isn'tappropriate, note that there is only one sign change, when the cashflows go from negative 200,000 to positive 300,000. This meansthere is only 1 sign change and 1IRR.                                       

2a        What is the IRR ofthe project?

2b        Should the projectbe accepted or rejected based on IRR and why?

3a        What is the Paybackperiod of the project?   

3b        Should the projectbe accepted or rejected based on Payback and why?   

4a        What is theprofitability index or PI of the project?   

4b       Should the projectbe accepted or rejected based on PI and why?

5         If thefirm's required rate of return increased, what would be the impacton each of the values?                                                   

5a Effect on NPV andwhy:                                                        

5b Effect on IRR andwhy:                                                          

5c Effect on Payback period andwhy:                                                    

5d Effect on PI andwhy: