You are evaluating the Home Net project under the following assumptions: new tax laws allow 100% bonus depreciation (all the depreciation expense,

$120

million, occurs when the asset is put into use, in this case immediately). 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

9%

annually and a year 1 cost of

$120/unit

decreasing by

21%

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). 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 Home Net will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). However, receivables related to Home Net 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

.

Using the FCF projections given:

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

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