pu 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 evelop 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 ears 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. -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. What is the project's NPV if the project's cost of capital is 10.7%? 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 OS 798,000 YOY growth Variable costs % of sales 55% Fixed costs Investment (907,000) Total cash flows (907,000)
pu 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 evelop 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 ears 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. -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. What is the project's NPV if the project's cost of capital is 10.7%? 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 OS 798,000 YOY growth Variable costs % of sales 55% Fixed costs Investment (907,000) Total cash flows (907,000)
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1eM
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Transcribed Image Text: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 throough 5?
Calculate the cash flows below: (Round to the nearest dollar.)
1
Revenues
$
O $
798,000
YOY growth
Variable costs
% of sales
55%
Fixed costs
Investment
(907,000)
Total cash flows
(907,000)
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