The Sopchoppy Motorcycle Company is considering an investment…

The Sopchoppy Motorcycle Company is considering an investment of $600,000 in a new motorcycle. 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 manu- facturing equipment for $200,000. Assume the equipment is depreci- ated at the rate of $200,000 each year. Sopchoppy’s tax rate is 40%.

1. What are the net cash flows for each year of the motorcycle’s three-year life?
2. What is the net present value of the investment if the cost of cap- ital is 10%?
3. What is the net present value of the motorcycle investment if the cost of capital is 5%?
4. What is the profitability index of this investment if the cost of capital is 5%?
5. What is the payback period of the investment?
6. What is the discounted payback period of the investment if the cost of capital is 5%?
7. What is the internal rate of return of the investment?
8. What is the modified internal rate of return of the motorcycle investment if the cash flows are reinvested at 5%?
9. If the cost of capital is 10%, should Sopchoppy invest in this motorcycle?