Question

ct the Killer Lab d. How far UIT LUUIU OPCIJAJCUJE ULU decision would change? 8. You are CEO of Rivet Networks, maker of ultra-high performance network cards for gam computers, and you are considering whether to launch a new product. The product, the X3000, will cost $900,000 to develop upfront (year 0), and you expect revenues the first y $800,000, growing to $1.5 million the second year, and then declining by 40% per year fo next 3 years before the product is fully obsolete. In years 1 through 5, you will have fixed associated with the product of $100,000 per year, and variable costs equal to 50% of rey 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 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 becom unprofitable; that is, estimate the project's IRR. the first year of er year for the ave fixed costs % of revenues

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

C D E F G H I Year-1 Year 2 Year 3 Year 4 Year 5 Year 0 $900,000.00 Initial Cost Revenue Variable Cost Fixed Cost a. Cash Flows $800,000.00 $400,000.00 $100,000.00 $300,000.00 $1,500,000.00 $750,000.00 $100,000.00 $650,000.00 $900,000.00 $450,000.00 $100,000.00 $350,000.00 $540,000.00 $270,000.00 $100,000.00 $170,000.00 $324,000.00 $162,000.00 $100,000.00 $62,000.00 8 -$900,000.00 10 b. NPV 11 12 13 14 Discount Rates 0% 10% 20% 30% 40% NPV $632,000.00 $327,486.95 $110,834.62 -$49,087.11 -$170,750.28 15 16 NPV $700,000.00 $600,000.00 $500,000.00 $400,000.00 $300,000.00 $200,000.00 $100,000.00 $0.00 -$100,000.00 0% -$200,000.00 -$300,000.00 10% 20% 30% 40% 50% Discount rates c. Cost of Capital Project's NPV 10% $327,486.95 28 29 30 d. Project's IRR 26.62% 31 32

Cell reference -

A B C D E F G H | Year 0 Year-1 Year 2 Year 3 Year 4 Year 5 Initial Cost 900000 Revenue Variable Cost Fixed Cost Cash Flows 800000 1500000 =E5*(1-40%) =F5*(1-40%) =G5*(1-40%) =D5*50% =E5*50% =F5*50% =G5*50% =H5*50% 100000 100000 100000 100000 100000 =D5-D6-D7 =E5-E6-E7 =F5-F6-F7 =G5-G6-G7 =H5-H6-H7 --C3 NPV 0.1 Discount Rates NPV =NPV(B11, $D$8:$H$8)+$C$8 =NPV(B12,$D$8:SH$8)+$C$8 =NPV(B13,$D$8:$H$8)+$C$8 0.3 =NPV(B14,$D$8:$H$8)+$C$8 0.4 =NPV(B15,$D$8:$H$8)+$C$8 0.2 Ž $700,000.00 $600,000.00 $500,000.00 $400,000.00 $300,000.00 $200,000.00 $100,000.00 $0.00 -$100,000.00 -$200,000.00 -$300,000.00 10% 20% 30% 40% 50% Discount rates Cost of Capital 0.1 Project's NPV =NPV(C26, D8:H8)+C8 d. Project's IRREIRR(C8:H8) 31

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.