You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you are considering whether to launch a new product. The product, the Killer X3000, will cost $893,000 to develop up front (year 0), and you expect revenues the first year of $807,000, growing to $1.42 million the second year, and then declining by 45% per year for the next 3 years before the product is fully obsolete. In years 1 through 5, you will have fixed costs associated with the product of $107,000 per year, and variable Costs equal to 45% of revenues. a. What are the cash flows for the project in years 0 through 5? . Plot the NPV profile for this investment using discount rates from 0% to 40% in 10% increments. c. What is the project's NPV if the project's cost of capital is 9.4%? d. Use the NPV profile to estimate the cost of capital at which the project would become unprofitable; that is, estimate the project's IRR. a. What are the cash flows for the project in years 0 through 5? Calculate the cash flows below: (Round to the nearest dollar.) 0
You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you are considering whether to launch a new product. The product, the Killer X3000, will cost $893,000 to develop up front (year 0), and you expect revenues the first year of $807,000, growing to $1.42 million the second year, and then declining by 45% per year for the next 3 years before the product is fully obsolete. In years 1 through 5, you will have fixed costs associated with the product of $107,000 per year, and variable Costs equal to 45% of revenues. a. What are the cash flows for the project in years 0 through 5? . Plot the NPV profile for this investment using discount rates from 0% to 40% in 10% increments. c. What is the project's NPV if the project's cost of capital is 9.4%? d. Use the NPV profile to estimate the cost of capital at which the project would become unprofitable; that is, estimate the project's IRR. a. What are the cash flows for the project in years 0 through 5? Calculate the cash flows below: (Round to the nearest dollar.) 0
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and
you are considering whether to launch a new product. The product, the Killer X3000, will cost $893,000 to
develop up front (year 0), and you expect revenues the first year of $807,000, growing to $1.42 million the
second year, and then declining by 45% per year for the next 3 years before the product is fully obsolete. In
years 1 through 5, you will have fixed costs associated with the product of $107,000 per year, and variable
costs equal to 45% of revenues.
a. What are the cash flows for the project in years 0 through 5?
b. Plot the NPV profile for this investment using discount rates from 0% to 40% in 10% increments.
c. What is the project's NPV if the project's cost of capital is 9.4%?
d. Use the NPV profile to estimate the cost of capital at which the project would become unprofitable; that is,
estimate the project's IRR.
a. What are the cash flows for the project in years 0 through 5?
Calculate the cash flows below: (Round to the nearest dollar.)
Revenues
YOY growth
Variable costs
% of sales
Fixed costs
Investment
Total cash flows
0
0 $
(893,000)
(893,000)
1
807,000
45%
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