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 through5?
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 theproject's IRR.

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%

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