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 $900,000 to develop up front (year 0), and you expect revenues the first year of $800,000, growing to $1.5 million the second year, and then declining by 40% 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 $100,000 per year, and variable costs equal to 50% of revenues. What are the cash flows for the project in years 0 through 5? а. b. Plot the NPV profile for this investment from 0% to 40% in 10% increments. What is the project's NPV if the project's cost of capital is 10%? с. Use the NPV profile to estimate the cost of capital at which the project would become unprofitable; that is, estimate the project’s IRR. d.
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 $900,000 to develop up front (year 0), and you expect revenues the first year of $800,000, growing to $1.5 million the second year, and then declining by 40% 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 $100,000 per year, and variable costs equal to 50% of revenues. What are the cash flows for the project in years 0 through 5? а. b. Plot the NPV profile for this investment from 0% to 40% in 10% increments. What is the project's NPV if the project's cost of capital is 10%? с. Use the NPV profile to estimate the cost of capital at which the project would become unprofitable; that is, estimate the project’s IRR. d.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 $900,000 to develop up front (year 0), and you expect revenues the first year of $800,000,
growing to $1.5 million the second year, and then declining by 40% 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 $100,000 per year, and variable costs equal to 50% of revenues.
а.
What are the cash flows for the project in years 0 through 5?
b. Plot the NPV profile for this investment from 0% to 40% in 10% increments.
What is the project's NPV if the project's cost of capital is 10%?
с.
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.
Double-click the image to open the Excel spreadsheet and fill the cells
Rivet Networks
Cost of Capital
1
4
5
Revenues
yoy growth
Variable Costs
% sales
Fixed Costs
Investment
Total Cash Flow
Discount Factor
PV
NPV
IRR
#NUM!
Discount rate
0%
5%
NPV Profile
10%
1
15%
1
20%
1
25%
1
30%
1
35%
40%
45%
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