Reference no: EM13865696

You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year 1 increasing by 53,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 11% annually and a year 1 cost of $120/unit decreasing by 21% 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 1707 . 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 $__.

The NPV of the FCF's of the HomeNet project assuming a cost of capital of 12% is __.

The ICPV of the FCF's of the HomeNet project assuming a cost of capital of 14% is $__.

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

The IRR is ____%.

	Year               0		1	2	3	4	5
HomeNet
Units Sales (000s)		53	50	103	156	209
Sales Price (S unit)		11%	260	231.40	205.95	183.30
Cost of Goods Sold (S/unit)		21%	120	94.80	74.89	59.16
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	23,834	32,128	38,310
2 Cost of Goods Sold			(6,000)	(9,764)	(11,683)	(12,364)
3    Gross Profits			7,000	14,070	20,445	25,946
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	3,770	15,145	23,146
8 Income Tax at 40%		6,000	(680)	(3,508)	(6,058)	(9,258)
9 Unlevered Net Income		(9,000)	1,020	5,262	9,087	13,888
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)	(1,060)	(957)	(325)
13 Free Cash Flow		(16,500)	2,470	6,702	10,630	13,063	3,892