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Projected Electrobicycle Financial Projection
Projected Electrobicycle Financial Projection
To get the NPV, we add all the PVs of the cash flows, which is $380,960.07.
Why Working Capital Investments Are Subtracted in the Cash Flows
We subtract capital investments from cash flows to account for the money invested into the business through net working capital when determining the cash flow available to investors. Working capital investments are more investments in working capital, which is a cash outflow. As a result, it has to be deducted.
The Meaning of the Required Rate of Return
The required return of any given project is the lowest possible return investors will accept for assuming some specific risk level. Therefore, it is the minimum return that the project’s investors expect to receive for their investment.
A Required Rate of Return of 15% for the Auto Company
A 10% required return rate used for the Electrobicycles is lower than that of the auto company. Therefore, the Electrobicycle project is less risky than the auto company. The risk-return trade-off indicates that when the risk is high, the return is also high and vice versa. Consequently, a 15% required rate of return is greater than 10% for the Electrobicycle, indicating that the Electrobicycle is a lower-risk investment.
Decision The NPV decision criteria is that projects are accepted when they have a positive NPV. The Electrobicycle project has an NPV of $380,960.07. Therefore, the company should………
