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 $ 903 comma 000 to develop up front​ (year 0), and you expect revenues the first year of $ 794 comma 000​, growing to $ 1.53 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 $ 99 comma 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 9.5 %​?

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

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