You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year...

 

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You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year 1 increasing by 51,000 units per year over the life of the project, a year 1 sales price of $260.00/unit, decreasing by 11% annually and a year 1 cost of $120.00/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 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: a. Using the FCF projections given, calculate the NPV of the HomeNet project assuming a cost of capital of 12%, 14%, and 16%. b. What is the IRR of the project in this case? a. Using the FCF projections given, calculate the NPV of the HomeNet project assuming a cost of capital of 12%, 14%, and 16%. The NPV of the FCF's of the HomeNet project assuming a cost of capital of 12% is $ (Round to the nearest thousand dollars.) (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 3 4 HomeNet Units Sales (000s) 51 Sales Price ($/unit) 11% Cost of Goods Sold ($/unit) 21% 50 101 152 260.00 231.40 205.95 203 183.30 120.00 94.80 74.89 59.16 Operating Expenses ($000s) Hardware and Software Development (15,000) - - - Marketing and Technical Support - (2,800) (2,800) (2,800) (2,800) Capital Expenditures Lab Equipment Depreciation (7,500) 100% | | Corporate Tax Rate 20% 20% 20% 20% 20% (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 2 3 4 5 Incremental Earnings Forecast ($000s) 1 Sales 2 Cost of Goods Sold 3 Gross Profits 4 Selling, General, and Administrative 5 Research and Development 6 Depreciation 7 EBIT 8 Income Tax at 20% 9 Unlevered Net Income Free Cash Flow ($000s) 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (15,000) (7,500) (22,500) 4,500 - 13,000 23,371 31,304 37,210 (6,000) (9,575) (11,383) (12,009) 7,000 13,796 19,921 25,201 (2,800) (2,800) (2,800) (2,800) - - 4,200 10,996 17,121 22,401 (840) (2,199) (3,424) (4,480) (18,000) 3,360 8,797 13,697 17,921 7,500 (7,500) (1,050) (1,020) (919) (792) 3,781 (18,000) 2,310 7,777 12,778 17,129 3,781 You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year 1 increasing by 51,000 units per year over the life of the project, a year 1 sales price of $260.00/unit, decreasing by 11% annually and a year 1 cost of $120.00/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 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: a. Using the FCF projections given, calculate the NPV of the HomeNet project assuming a cost of capital of 12%, 14%, and 16%. b. What is the IRR of the project in this case? a. Using the FCF projections given, calculate the NPV of the HomeNet project assuming a cost of capital of 12%, 14%, and 16%. The NPV of the FCF's of the HomeNet project assuming a cost of capital of 12% is $ (Round to the nearest thousand dollars.) (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 3 4 HomeNet Units Sales (000s) 51 Sales Price ($/unit) 11% Cost of Goods Sold ($/unit) 21% 50 101 152 260.00 231.40 205.95 203 183.30 120.00 94.80 74.89 59.16 Operating Expenses ($000s) Hardware and Software Development (15,000) - - - Marketing and Technical Support - (2,800) (2,800) (2,800) (2,800) Capital Expenditures Lab Equipment Depreciation (7,500) 100% | | Corporate Tax Rate 20% 20% 20% 20% 20% (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 2 3 4 5 Incremental Earnings Forecast ($000s) 1 Sales 2 Cost of Goods Sold 3 Gross Profits 4 Selling, General, and Administrative 5 Research and Development 6 Depreciation 7 EBIT 8 Income Tax at 20% 9 Unlevered Net Income Free Cash Flow ($000s) 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (15,000) (7,500) (22,500) 4,500 - 13,000 23,371 31,304 37,210 (6,000) (9,575) (11,383) (12,009) 7,000 13,796 19,921 25,201 (2,800) (2,800) (2,800) (2,800) - - 4,200 10,996 17,121 22,401 (840) (2,199) (3,424) (4,480) (18,000) 3,360 8,797 13,697 17,921 7,500 (7,500) (1,050) (1,020) (919) (792) 3,781 (18,000) 2,310 7,777 12,778 17,129 3,781