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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 $893,000 to develop up front (year 0), and you expect revenues the first year of $807,000, growing to $1.42 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 $107,000 per year, and variable Costs equal to 45% of revenues. a. What are the cash flows for the project in years 0 through 5? . 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 9.4%? 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

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 $893,000 to develop up front (year 0), and you expect revenues the first year of $807,000, growing to $1.42 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 $107,000 per year, and variable Costs equal to 45% of revenues. a. What are the cash flows for the project in years 0 through 5? . 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 9.4%? 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

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 22P
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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 $893,000 to develop up front (year 0), and you expect revenues the first year of $807,000, growing to $1.42 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 $107,000 per year, and variable costs equal to 45% 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 9.4%? 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.) Revenues YOY growth Variable costs % of sales Fixed costs Investment Total cash flows 0 0 $ (893,000) (893,000) 1 807,000 45%
Transcribed Image Text: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 $893,000 to develop up front (year 0), and you expect revenues the first year of $807,000, growing to $1.42 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 $107,000 per year, and variable costs equal to 45% 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 9.4%? 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.) Revenues YOY growth Variable costs % of sales Fixed costs Investment Total cash flows 0 0 $ (893,000) (893,000) 1 807,000 45%
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