Acme Co Electric Bicycle Business Investment NPV Calculation

Net Present Value Calculation for Acme Co's Electric Bicycle Investment

The Net Present Value (NPV) of an investment represents the present value of all expected cash flows, discounted at the required rate of return. In this case, we need to calculate the NPV of Acme Co's investment in the electric bicycle business. NPV is $1,607,437.01

Let's break down the information provided step by step:

1. Initial Information:

Acme Co has decided to invest $1,500,000 into the electric bicycle business, and production will start immediately.

2. Cash Flows Scenario:

If there is high demand for Acme's electric bicycles (20% probability), it will generate $300,000 every year in perpetuity. If there is low demand (80% probability), it will generate $50,000 each year for two years. After two years of low demand, there is a possibility for high or low demand again.

3. Cash Flows After Two Years:

If there is high demand after two years of low demand (30% probability), Acme will generate $300,000 each year in perpetuity. If there is low demand after two years of low demand (70% probability), it will generate $50,000 each year in perpetuity.

Calculation:

To calculate the NPV, we need to discount each cash flow to its present value and then sum them up.

NPV Calculation:

NPV = Initial Investment + Present Value of Year 1 Cash Flows + Present Value of Year 2 Cash Flows + Present Value of Cash Flows after Year 2