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 $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 0 through 51
B. Plot the NPV profile for this nvestment using discount rates from 0% to 50% in 5% 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 or calculate it using the data.
Initial investment $900,000
Revenues vear 1 $800,000
Revenues vear 2 $1,500,000
Revenues decline years 4000
Fixed costs vears 1-5 $100,000
Variable costs 50%

Answer 1

F= (900,000)

F1= 300,000

F2 = 650,000

F3 = 350,000

F4 = 170,000

F5 = 62,000

NPV at 10% $327487

IRR 20.587%

Step-by-step explanation:

F0 -900,000

revenues variable cost fixed cost net flow

F1 800,000 -400000 -100,000 = 300,000

F2 1,500,000 -750000 -100,000 = 650,000

F3 900000 -450000 -100,000 = 350,000

F4 540000 -270000 -100,000 = 170,000

F5 324000 -162000 -100,000 = 62,000

NPV at 10%:

For each cashflow, we apply the discount of a lump sum formula

`(Maturity)/((1 + rate)^(time) ) = PV`

And add them together for the net present value

`\left[\begin{array}{ccc}Year&$cashflow&PV\\0&-900,000&-900,000\\1&300,000&272,727\\2&650,000&537,190\\3&350,000&262,960\\4&170,000&116,112\\5&62,000&38,497\\Total&&327487\\\end{array}\right]`

We solve for the IRR using the excel IRR formula

we list the cashflow and use IRR to select them.