Question

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 $907,000 to develop up front (year 0), and you expect revenues the first year of $803,000, growing to $1.44 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 $102,000 per year, and variable costs equal to 50% 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.) 0 1 803,000 $ 0 $ Revenues YOY growth Variable costs % of sales Fixed costs 50% Investment (907,000) (907,000) Total cash flows

Answer 1

o 1 803000 Revenues ve 2 14400 3 4 5 792000 435600 239580 Investment Fixed cost Total CF 0 (401500) (720000 (396c0) 217800) (119790) (90700) - o (102000) (02000) (102000) (102000) (102000) (907000) 299500 618000 294000 115800 17.790 year 2 Discounting rales Cashflon DF PV gyon 299500 € 299500 84 104 618000 1826 510744 so 20% squauo 1579 170139 301. 158.00 1350 Yosus uoy. 12890 186 3308 ماد 1024236 NPV = (1024236-907000) = 117236 c) PV of Cash Inflows at DF 10,3% (299500x1907+618000 X 822 + 294000 x 745+ 115800x. .676 +17790 X 1613) = 271 646 +507996 +219030+ 78281+109051087858 NPV = (1087858-107000) -180858