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 $892,000 to develop up front (year 0), and you expect revenues the first year of $809,000, growing to $1.41 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 $101,000 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 10.8%? 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 3 4 1 809,000 $ $ 0 $ (45%) (45%) Revenues YOY growth Variable costs % of sales Fixed costs 404500 50% (101000) 2 1.410,000 74.3% 7 05000 50% (101000) (45%) N 50% (101000) 50% (101000) 50% (101000) Investment (892,000) (892,000) 000 Total cash flows 303500 604000

Answer 1

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11:28 W ' @ vor 1x 2 ENG 28-03-202024 X HM45 - HC HG HH HI HJ HK HL HM HN HA 41 a X ✓ fix HD HE HF CASH FLOWS FOR THE PROJECT IN YEARS O TO 5 YEAR REVENUES 809000 44 45 1410000 74% 705000 101000 3 775500 -45% 387750 101000 4 426525 -45% 213262.50 101000 234588.75 -45% 117294.38 101000 404500 101000 46 VARIABLE COSTS FIXED COSTS INVESTMENT TOTAL CASH FLOW -892000 -892000 303500 604000 286750 112262.5 16294.38 49 50 51 b NPV PROFILE 52 500000.00 53 400000.00 54 COST OF CAPITAL 0% 10% 20% 30% 40% NPV 430806.88 185316.49 6991.68 -126928.35 -230297.76 300000.00 55 56 200000.00 NPV 100000.00 58 0.00 59 [=NPV(HD57,$HF$48:$HJ$48) +SHE$48] 5% 10% 15% 20% 25% 30% 35% 40% 45% 60 CORRECT GRAPH: B 0% -100000.00 -200000.00 -300000.00 62 63 COST OF CAPITAL 64 ... EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS ... Đ TI

11:28 W ' @ vor 1x 2 ENG 28-03-202024 X HM88 - X fx HC HD HE HE HG HH H L HJ HK HL HM HN HA 65 66 67 C 68 NPV AT 10.8% COST OF CAPITAL NPV = 10.80% 168958.52 (=NPV(HE68,$HF$48:$HJ$48) +SHE$48] APPROXIMATE IRR = 20% 70 71 d. 72 73 74 75 76 77 78 83 84 85 87 88 ... EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS ... Đ TI