Answered: a. What are the cash flows for the…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1eM

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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 $899,000 to develop up front (year 0), and you expect revenues the first year of $806,000, growing to $1.51 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 $93,000 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. e. 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 through 57 Calculate the cash flows below: (Round to the nearest dollar.) Revenues YOY growth Variable costs % of sales Fixed costs Investment Total cash flows 0 (899,000) (800,000) 1 806,000 55%

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