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 $790,000​, growing to $1.43 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 $91,000 per​ year, and variable costs equal to 50% 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.

Respuesta :

Answer:

A)

year          cash inflows        cash outflows       net cash flows

0                       0                        -900,000              -900,000

1                 790,000                  -486,000               304,000

2                1,430,000                -806,000              624,000

3                786,500                  -484,250               302,250

4                432,575                  -307,288                125,287

5                 68,908                   -125,454                -56,546

B)

NPV 0% discount rate = $398,991

NPV 10% discount rate = $169,613

NPV 20% discount rate = -$725

NPV 30% discount rate = -$130,712

NPV 40% discount rate = -$232,241

C)

NPV 10.3% discount rate = $163,760

D)

almost 20%, since the IRR is the discount rate where NPV = $0

Actual IRR = 19.95%