Research and development expenditures total $15 million in year 0 and? selling, general, and administrative expenses are $2.8 million per year?

You are evaluating the HomeNet project under the following? assumptions: Sales of 50,000 units in year 1 increasing by 49,000 units per year over the life of the? project, a year 1 sales price of $260?/unit, decreasing by 10% annually and a year 1 cost of $120?/unit decreasing by 20% annually. In? addition, new tax laws allow you to depreciate the? equipment, costing $7.5 ?million, over three years using? straight-line depreciation. Research and development expenditures total $15 million in year 0 and? selling, general, and administrative expenses are $2.8 million per year? (assuming there is no? cannibalization). Also assume HomeNet will have no incremental cash or inventory requirements? (products will be shipped directly from the contract manufacturer to? customers). ? However, receivables related to HomeNet are expected to account for 15% of annual? sales, and payables are expected to be 15% of the annual cost of goods sold. Under these assumptions the unlevered net? income, net working capital requirements and free cash flow are shown in the Table

Year 0 1 2 3 4 5

HomeNet

Units Sales? (000s) 49 50 99 148 197 –

Sales Price? ($/unit) 10?% 260 234.00 210.60 189.54

Cost of Goods Sold? ($/unit) 20% 120 96.00 76.80 61.44 ?-

Operating Expenses? ($000s) ?-

Hardware? & Software Develop.?(15,000) ?-

Marketing? & Technical Support ?(2,800)?(2,800)?(2,800)?(2,800) ?-

Capital Expenditures ?-

Lab Equipment ?(7,500) ?-

Depreciation ? 33%? 33% ? 33% ?- ?-

Marginal Corporate Tax Rate ? 40% ?40% 40% ? 40% ? 40% ?-

Year 0 1 2 3 4 5

Incremental Earnings

Forecast? ($000)

1 Sales ?- 13,000 23,166 31,169 37,339 ?-

2 Cost of Goods Sold – (6,000) ( 9,504) (11,366) (12,104) -3 Gross Profits ?- 7,000 13,662 19,803 25,235?-

4 ?Selling, General, and

Administrative ?- ?(2,800) ?(2,800) ?(2,800) ?(2,800) ?-

5 Research and

Development ?(15,000) ?- ?- ?- ?- ?-

6 Depreciation ?- ?(2,500) ?(2,500) ?(2,500) ?- ?-

7 EBIT ?(15,000) 1,700 8,362 14,503 22,435 ?-

8 Income Tax at? 40% ?6,000 (680) (3,345) (5,801) (8,974) ?-

9 Unlevered Net Income ?(9,000) 1,020 5,017 8,702 13,461 ?-

Free Cash Flow? ($000)

10 ?Plus: Depreciation ?- ?2,500 ?2,500 ?2,500 ? – ?-

11 ?Less: Capital

Expenditures ?(7,500) ?- ?- ?- ?- ?-

12 ?Less: Increases in NWC ?(1,050?) (999) (921) (815)

13 Free Cash Flow (16,500) 2,470 6,518 10,281 12,646 3,785

Using the FCF projections? given:

a. Calculate the NPV of the HomeNet project assuming a cost of capital of 10%?, 12% and 14%.

The NPV of the? FCF’s of the HomeNet project assuming a cost of capital of 10% is ????? . ? (Round to the nearest thousand? dollars.)

The NPV of the? FCF’s of the HomeNet project assuming a cost of capital of 12% is ???? . ? (Round to the nearest thousand? dollars.)

The NPV of the? FCF’s of the HomeNet project assuming a cost of capital of 14% is ???? . ?(Round to the nearest thousand? dollars.)

b. What is the IRR of the project in this? case?

The IRR is ?? ?%. ? (Round to one decimal? place.)

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