The Management of Cinelli Corporation is evaluating an investment project that involves construction of four assembly lines to produce electrical bicycles. Each assembly line costs $25,000,000 today. The management estimates that the assembly lines will generate operating cash flows of $50,000,000 at the end of each year for the next 4 years. The management, in addition, plants to modify the assembly lines at the end of the second year to produce redesigned electrical bicycles. This modification costs the company $60,000,000. The management plans to sell the assembly lines to Bandini Electric Vehicle Manufacturing Company (BEVMC) for $80,000,000 for tax-saving purposes at the end of year 4.
The Management of Cinelli believes the cost of capital for the project should be 16 percent due to the riskiness of the electrical bicycles market.
A) Calculate regular payback, NPV, IRR, MIRR, and Profitability index for this project.
B) Should Cinelli management pursue the project or not? Why?