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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 $908,000 to develop up front (year 0), and you expect revenues the first year of $794,000, 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 years 1 through 5, you will have fixed costs associated with the product of $95,000 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 10.3%? 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 through 5?

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 $908,000 to develop up front (year 0), and you expect revenues the first year of $794,000, 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 years 1 through 5, you will have fixed costs associated with the product of $95,000 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 10.3%? 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 through 5?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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NPV Profile NPV Profile 700,000- 700,000- 500,000- 500,000- 300,000- 300,000- 100,000- 100,000- 10 15 20 25 30 35 40 5 10 15 25 30 35 40 -100,000- -100,000- -300,000- -300,000- Discount Rate (%) Discount Rate (%) c. What is the project's NPV if the project's cost of capital is 10.3%? The NPV is $ (Round to the nearest dollar.) 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. (For a zoom in on the NPV profile, click here Based on the NPV profile, the approximate internal rate of return is %. (Round to the nearest integer.) NPV ($) of NPV ($)
Transcribed Image Text:NPV Profile NPV Profile 700,000- 700,000- 500,000- 500,000- 300,000- 300,000- 100,000- 100,000- 10 15 20 25 30 35 40 5 10 15 25 30 35 40 -100,000- -100,000- -300,000- -300,000- Discount Rate (%) Discount Rate (%) c. What is the project's NPV if the project's cost of capital is 10.3%? The NPV is $ (Round to the nearest dollar.) 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. (For a zoom in on the NPV profile, click here Based on the NPV profile, the approximate internal rate of return is %. (Round to the nearest integer.) NPV ($) of NPV ($)
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 $908,000 to develop up front (year 0), and you expect revenues the first year of $794,000, 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 years 1 through 5, you will have fixed costs associated with the product of $95,000 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 10.3%? 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 5? Calculate the cash flows below: (Round to the nearest dollar.) 1 3 4 Revenues 0 $ 794,000 $ 1,580,000 YOY growth 99% (45%) (45%) (45%) Variable costs % of sales 55% 55% 55% 55% 55% Fixed costs Investment (908,000) Total cash flows (908,000) b. Plot the NPV profile for this investment using discount rates from 0% to 40% in 10% increments. The graph depicting the correct NPV profile is: (Select the best choice below.) O A. В.
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 $908,000 to develop up front (year 0), and you expect revenues the first year of $794,000, 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 years 1 through 5, you will have fixed costs associated with the product of $95,000 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 10.3%? 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 5? Calculate the cash flows below: (Round to the nearest dollar.) 1 3 4 Revenues 0 $ 794,000 $ 1,580,000 YOY growth 99% (45%) (45%) (45%) Variable costs % of sales 55% 55% 55% 55% 55% Fixed costs Investment (908,000) Total cash flows (908,000) b. Plot the NPV profile for this investment using discount rates from 0% to 40% in 10% increments. The graph depicting the correct NPV profile is: (Select the best choice below.) O A. В.
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