PART 1: A new product, Home Net Allows you to control internet-capable appliances, home entertainment, heating...
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PART 1: A new product, Home Net Allows you to control internet-capable appliances, home entertainment, heating and air-conditioning. The following information is available on the product: • An intensive feasibility study costing $300,000 has already been completed • Projected sales are 100,000 units per year at $260 per unit for 4 year's (zero thereafter) • Production will be outsourced at $110 per unit • Marketing and support expenses will be $2.8 million per year • Engineering and design costs to refine the hardware will be $5 million up front Software development costs will be $10 million up front • Assume Engineering and Software costs will be amortised (depreciated) over four years • Equipment to allow manufacturers to verify compatibility of internet-capable devices will cost $7.5 million. This will be depreciated straight line over 5 years to zero salvage value. The equipment will be sold in year 4 for $2 million • For the HomeNet project, Engineering development will use warehouse space that the company would have otherwise rented out for $200,000 per year • As a result of offering HomeNet, EBITDA from other products will fall by $1.5 million per year • HomeNet, will need $2,250,000 in working capital initially. This will be fully recoverable at the end of the project. • Tax rate is 30%, required return is 15% What is the NPV of this new product? Should they accept or reject the product? PART 2: 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 economics of scale. Therefore, you decide to redo the projections under the following assumptions: Sales of 50,000 units 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. Keeping the other assumptions that underlie PART 1 the same, recalculate unlevered net income. PART 3: Suppose that HomeNet will have no incremental cash or inventory requirements. 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 (COGS). Using the assumptions in PART B to calculate the net working capital requirement. PART 4: Calculate HomeNet's FCF from PART 2 and PART 3's information. What is the NPV of this new product, assume the discount rate is 15%. Should they accept or reject the product? PART 1: A new product, Home Net Allows you to control internet-capable appliances, home entertainment, heating and air-conditioning. The following information is available on the product: • An intensive feasibility study costing $300,000 has already been completed • Projected sales are 100,000 units per year at $260 per unit for 4 year's (zero thereafter) • Production will be outsourced at $110 per unit • Marketing and support expenses will be $2.8 million per year • Engineering and design costs to refine the hardware will be $5 million up front Software development costs will be $10 million up front • Assume Engineering and Software costs will be amortised (depreciated) over four years • Equipment to allow manufacturers to verify compatibility of internet-capable devices will cost $7.5 million. This will be depreciated straight line over 5 years to zero salvage value. The equipment will be sold in year 4 for $2 million • For the HomeNet project, Engineering development will use warehouse space that the company would have otherwise rented out for $200,000 per year • As a result of offering HomeNet, EBITDA from other products will fall by $1.5 million per year • HomeNet, will need $2,250,000 in working capital initially. This will be fully recoverable at the end of the project. • Tax rate is 30%, required return is 15% What is the NPV of this new product? Should they accept or reject the product? PART 2: 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 economics of scale. Therefore, you decide to redo the projections under the following assumptions: Sales of 50,000 units 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. Keeping the other assumptions that underlie PART 1 the same, recalculate unlevered net income. PART 3: Suppose that HomeNet will have no incremental cash or inventory requirements. 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 (COGS). Using the assumptions in PART B to calculate the net working capital requirement. PART 4: Calculate HomeNet's FCF from PART 2 and PART 3's information. What is the NPV of this new product, assume the discount rate is 15%. Should they accept or reject the product?
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Answer rating: 100% (QA)
SOLUTIONS PART 1 To calculate the NPV of the new product we need to consider the cash flows associated with the project Lets break down the information provided Initial investment Engineering and desi... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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