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 prođuct. The product, the Killer X3000, will cost $900,000 to develop upfront (year 0), and you expect revenues the first year of $800,000, growing to S1.5 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 900000
Revenues year 1 800000
Revenues year 2 1500000
Revenues decline years 4000
Fixed costs years 1-5 100000
Variable costs 50%
What are the cash flows for the project in years 0 through 5?