For the assumptions in part (a) of Problem 5, assuming a cost of capital of 12%, calculate the following:

a. The break-even annual sales price decline.

b. The break-even annual unit sales increase.

Data from problem 5 

After looking at the projections of the HomeNet project, you decide that they are not realistic. It is unlikely that sales will be constant over the four-year life of the project. Furthermore, other companies are likely to offer competing products, so the assumption that the sales price will remain constant is also likely to be optimistic. Finally, as production ramps up, you anticipate lower per unit production costs resulting from economies of scale. Therefore, you decide to redo the projections under the following assumptions: Sales of 50,000 units in year 1 increasing by 50,000 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 100% bonus depreciation (all the depreciation expense occurs when the asset is put into use, in this case immediately).

a. Keeping the other assumptions that underlie Table 8.1 the same, recalculate unlevered net income (that is, reproduce Table 8.1 under the new assumptions, and note that we are ignoring cannibalization and lost rent).

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TABLE 8.1 SPREADSHEET HomeNet's Incremental Earnings Forecast Year 0 1 2 3 4 5 5 6 Incremental Earnings Forecast ($000s) 1 Sales 2 Cost of Goods Sold 3 Gross Profit 4 Selling, General, and Administrative Research and Development Depreciation 26,000 26,000 26,000 26,000 (11,000) (11,000) (11,000) (11,000) 15,000 15,000 15,000 15,000 (2,800) (2,800) (2,800) (2,800) (15,000) - - - (1,500) (1,500) (1,500) (1,500) (1,500) 7 EBIT (15,000) 10,700 10,700 10,700 10,700 (1,500) 8 Income Tax at 20% 3,000 9 Unlevered Net Income (12,000) (2,140) (2,140) 8,560 8,560 (2,140) (2,140) 300 8,560 8,560 (1,200)