Question
3. After looking at the projections of the HomeNet project, you decide that they are not realistic. It is unlikely that sales will be constant
3.
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 followingassumptions: Sales of
50 comma 00050,000
units in year 1 increasing by
50 comma 00050,000
units per year over the life of the project, a year 1 sales price of
$ 260$260/unit,
decreasing by
10 %10%
annually and a year 1 cost of
$ 120$120/unit
decreasing by
20 %20%
annually. In addition, new tax laws allow you to depreciate the equipment, costing
$ 7.5$7.5
million over three rather than five years using straight-line depreciation.
a. Keeping the underlying assumptions in Table 1 (
LOADING...
) that research and development expenditures total
$ 15$15
million in year 0 and selling, general, and administrative expenses are
$ 2.8$2.8
million per year, recalculate unlevered net income. (That is, reproduce Table 1 under the new assumptions given above. Note that we are ignoring cannibalization and lost rent.)
b. Recalculate unlevered net income assuming, in addition, that each year
20 %20%
of sales comes from customers who would have purchased an existing Cisco router for
$ 100$100/unit
and that this router costs
$ 60$60/unit
to manufacture.
Year 0 4 ncremental Earnings Forecast ($000) 1 Sales 21 Cost Of Goods Sold 3 Gross Profits 4 Selling, General, and Administrative 5 Research and Development 6 Depreciation 7 EBIT 8 | Income Tax at 40% 9 Unlevered Net Income 26000 11,000) (11,000) (11,000) (11,000) 26000 26000 26000 15000 15000 15000 2,800) (2,800) (2,800) (2,800) (15,000) 500) (1,500) (1,500) 1,500) 10700107001070010700 1,500) (15,000) 6000 (4,280) 4,280) (4,280) 4,280) 9,000 600 6420 6420 6420 6420(900) Year 0 4 ncremental Earnings Forecast ($000) 1 Sales 21 Cost Of Goods Sold 3 Gross Profits 4 Selling, General, and Administrative 5 Research and Development 6 Depreciation 7 EBIT 8 | Income Tax at 40% 9 Unlevered Net Income 26000 11,000) (11,000) (11,000) (11,000) 26000 26000 26000 15000 15000 15000 2,800) (2,800) (2,800) (2,800) (15,000) 500) (1,500) (1,500) 1,500) 10700107001070010700 1,500) (15,000) 6000 (4,280) 4,280) (4,280) 4,280) 9,000 600 6420 6420 6420 6420(900)
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