Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 7, Problem 8P
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.
- a. What are the cash flows for the project in years O 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%?
- 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 .
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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 $902,000 to develop up front (year 0), and you expect revenues the first year of $792,000,
growing to $1.45 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
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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 10.2%?
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.
Year
Revenues
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Variable Costs
0
1
$
0 $
792,000…
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 $897,000 to develop up front (year 0), and you expect revenues the first year of $807,000, growing to
$1.41 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 $96,000 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 9.9%?
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…
Pou 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 $907,000 to
develop up front (year 0), and you expect revenues the first year of $798,000, growing to $1.58 million the second year, and then declining by 45% per year for the next 3 years before the product is fully obsolete. In
vears 1 through 5, you will have fixed costs associated with the product of $105,000 per year, and variable costs equal to 55% of revenues.
a. What are the cash flows for the project in years 0 through 5?
D. 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 10.7%?
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…
Chapter 7 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
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