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 $898,000 to develop up front​ (year 0), and you expect revenues the first year of $ 808,000​, growing to $1.57 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 $105,000 per​ year, and variable costs equal to 50 % of revenues.   

a. What are the cash flows for the project in years 0 through​ 5?

Calculate the cash flows​ below:  ​(Round to the nearest​ dollar.)

	0	1
Revenues	$0	$808,000
YOY growth
Variable costs
% of sales		50%
Fixed costs
Investment	(898,000)
Total cash flows	(898,000)

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 is10.5 %​?________.

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.________.

Answer 1