You are CEO of Rivet? Networks, maker of? ultra-high performance network cards f
ID: 2615604 • Letter: Y
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 $903,000 to develop up front? (year 0), and you expect revenues the first year of $805,000?, 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 $110,000 per? year, and variable costs equal to 50% of revenues.???
a. What are the cash flows for the project in years 0 through? 5?
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 10.1%?? 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.
Explanation / Answer
b.
c.
By interpolating 10% and 20% from the NPV profile, IRR = 18.26%.
Years 1 2 3 4 5 Sales 805000 1420000 781000 429550 236253 Variable cost 402500 710000 390500 214775 118126 Depreciation 180600 180600 180600 180600 180600 Fixed cost 110000 110000 110000 110000 110000 Net Profit 111900 419400 99900 -75825 -172474 Add: Depreciation 180600 180600 180600 180600 180600 Net Cash Flow 292500 600000 280500 104775 8126Related Questions
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