You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you

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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 $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?

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%?

Use the NPV profile to estimate the cost of capital at which the project would become unprofitable; that is, estimate the project's IRR?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Corporate Finance

ISBN: 978-0134083278

4th edition

Authors: Jonathan Berk, Peter DeMarzo

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