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 $1.2 million to develop upfront (year 0), and you expect revenues the first year of $807,000, growing to $1.54 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 $95,000 per year, and variable costs equal to 55% 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 10.5%?

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.