EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Chapter 7, Problem 8P
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 $900,000 to develop up front (year 0), and you expect revenues the first year of $800,000, growing to $1.5 million the second year, and then declining by 40% 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 $100,000 per year, and variable costs equal to 50% of revenues.
- a. What are the cash flows for the project in years O 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%?
- 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 .
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You are considering investing in a project related to a new product opportunity. If you undertake the project immediately, you calculate the NPV will be $165,000. If you postpone the decision for one year, you will learn more about the relevant manufacturing process as well as the market for your product. If you wait one year, you expect with 80 percent likelihood competitors will enter the market and your NPV (in one year) will be - $20,000. With 20 percent likelihood, you will be the only market player and you will improve your production technology to create an NPV (in one year) of $400,000. The appropriate discount rate is 11 percent.
Required:
Calculate the expected NPV if you defer the project for one year, regardless of the potential scenario.
Calculate the expected NPV if you strategically decide how to undertake your project. That is, if we find that competitors enter the market, we can decide not to enter.
Interpret the difference in your answers to parts 1 and 2.
our highly successful software company is considering adding a new software title to your list. If you add the new product, it will use the full capacity of your disk duplicating machines that you had planned on using for your flagship product, “Battlin’ Bobby.” You had previously planned on using the unused capacity to start selling “BB” on the West Coast in two years. Eventually, you would have had to purchase additional duplicating machines 10 years from today, but since your new product will use up the extra capacity, this will require moving this purchase up to 2 years from today. If the new machines will cost $101,000 and can be expensed under Section 179, your marginal tax rate is 21 percent, and your cost of capital is 10 percent, what is the opportunity cost associated with using the unused capacity for the new product? Do not round intermediate calculations. Round your answer to 2 decimal places
Suppose you work for a software company that has developed a new product. The patent on this product will last for seventeen years. You expect that the product will produce cash-flows of $10,000,000 in its 1st year and that this amount will grow at a rate of 4 percent per year for the next seventeen years. Once the patent expires, your competitors will be able to produce equivalents copies of your software and drive any future profits to zero. If the interest rate is 11 percent per year, then what is the present value of producing this software?
Chapter 7 Solutions
EBK CORPORATE FINANCE
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
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