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 $908,000 to develop up front (year 0), and you expect revenues the first year of $794,000, growing to $1.58 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 $95,000 per year, and variable costs equal to 55% 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 10.3%? 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 through 5?
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 $908,000 to develop up front (year 0), and you expect revenues the first year of $794,000, growing to $1.58 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 $95,000 per year, and variable costs equal to 55% 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 10.3%? 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 through 5?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:NPV Profile
NPV Profile
700,000-
700,000-
500,000-
500,000-
300,000-
300,000-
100,000-
100,000-
10
15
20
25
30
35
40
5
10
15
25
30
35
40
-100,000-
-100,000-
-300,000-
-300,000-
Discount Rate (%)
Discount Rate (%)
c. What is the project's NPV if the project's cost of capital is 10.3%?
The NPV is $
(Round to the nearest dollar.)
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. (For a zoom in on the NPV profile, click here
Based on the NPV profile, the approximate internal rate of return is %. (Round to the nearest integer.)
NPV ($)
of
NPV ($)
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 $908,000 to develop up front (year 0),
and you expect revenues the first year of $794,000, growing to $1.58 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 $95,000 per year, and variable costs equal to 55% 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 10.3%?
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.)
1
3
4
Revenues
0 $
794,000 $
1,580,000
YOY growth
99%
(45%)
(45%)
(45%)
Variable costs
% of sales
55%
55%
55%
55%
55%
Fixed costs
Investment
(908,000)
Total cash flows
(908,000)
b. Plot the NPV profile for this investment using discount rates from 0% to 40% in 10% increments.
The graph depicting the correct NPV profile is: (Select the best choice below.)
O A.
В.
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