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.
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 $ 904 comma 000 to develop up front (year 0), and you expect revenues the first year of $ 797 comma 000, growing to $ 1.42 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 $ 91 comma 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.
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