Suppose that the managers of the router division of Cisco Systems are considering the development of a wireless home networking appliance, called HomeNet, that will provide both the hardware and the software necessary to run an entire home from any Internet connection. In addition to connecting computers and smartphones, HomeNet will control Internet-capable televisions, streaming video services, heating and air-conditioning units, major appliances, security systems, office equipment, and so on. The major competitor for HomeNet is a product being developed by Brandt-Quigley Corporation.

Based on extensive marketing surveys, the sales forecast for HomeNet is 50,000 units per year. Given the pace of technological change, Cisco expects the product will have a four-year life and an expected wholesale price of $260 (the price Cisco will receive from stores). Actual production will be outsourced at a cost (including packaging) of $110 per unit.

To verify the compatibility of new consumer Internet-ready appliances, as they become available, with the HomeNet system, Cisco must also establish a new lab for testing purposes. It will rent the lab space, but will need to purchase $7.5 million of new equipment. The equipment will be depreciated using the straight-line method over a five-year life. Cisco’s marginal tax rate is 20%.

The lab will be operational at the end of one year. At that time, HomeNet will be ready to ship. Cisco expects to spend $2.8 million per year on rental costs for the lab space, as well as marketing and support for this product. Forecast the incremental earnings from the HomeNet project.