Rivet Networks Cost of Capital 0 1 2 3 4 5 Revenues yoy growth Variable Costs % sales Fixed Costs Investment Total Cash Flow Discount Factor PV NPV IRR #NUM! Discount rate - NPV Profile - 1 1 1 1 1 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 1 - 0 - 0 - 0 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 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. What are the cash flows for the project in years 0 through 5? b. Plot the NPV profile for this investment from 0% to 40% in 10% increments. 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. a. c. Double-click the image to open the Excel spreadsheet and fill the cells Rivet Networks Cost of Capital 4 0 1 3 5 2 Revenues yoy growth Variable costs 96 sales Fixed Costs Investment Total Cash Flow Discount Factor PV NPV IRR #NUMI Discount rate NPV Profile 1 1 1 1 0% 5% 10% 15% 2056 25% 30% 35% 40% 45% 50% 55% FOX 1 1 O o