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.$$ Therefore, you decide to redo the projections under the following$$ assumptions: Sales of $50$ comma $000$ units in year $1$ increasing by $50$ comma $000$ units per year over the life of the$$ project, a year $1$ sales price of $$$$260\mathrm{.}00/$unit$,$ decreasing by $11\%$ annually and a year $1$ cost of $$$$120\mathrm{.}00/$unit decreasing by $21\%$ annually. In$$ addition, new tax laws allow$100\%$ bonus depreciation$($all the depreciation expense occurs when the asset is put into$$ use, in this case$$ immediately$).$

a$.$ Keeping the other assumptions that underlie Table $8\mathrm{.}1($LOADING$...)$ the$$ same, recalculate unlevered net income$($that is$,$ reproduce Table $8\mathrm{.}1$ under the new$$ assumptions, and note that we are ignoring cannibalization and lost$$ rent$).$

b$.$ Recalculate unlevered net income including lost rent of $$$$200$ comma $000$ per$$ year, and assuming that each year $20\%$ of sales comes from customers who would have purchased an existing Cisco router for $$$$100\mathrm{.}00/$unit and that this router costs $ $60\mathrm{.}00/$unit to manufacture.

Year

$0$

$1$

$2$

$3$

$4$

$5$

Incremental Earnings Forecast$($$$000$s$)$

$1$

Sales

long dash

$26,000$

$26,000$

$26,000$

$26,000$

long dash

$2$

Cost of Goods Sold

long dash

$(11,000)$

$(11,000)$

$(11,000)$

$(11,000)$

long dash

$3$

Gross Profit

long dash

$15,000$

$15,000$

$15,000$

$15,000$

long dash

$4$

$$Selling$,$ General, and Administrative

long dash

$(2,800)$

$(2,800)$

$(2,800)$

$(2,800)$

long dash

$5$

Research and Development

$(15,000)$

long dash

long dash

long dash

long dash

long dash

$6$

Depreciation

long dash

$(1,500)$

$(1,500)$

$(1,500)$

$(1,500)$

$(1,500)$

$7$

EBIT

$(15,000)$

$10,700$

$10,700$

$10,700$

$10,700$

$(1,500)$

$8$

Income Tax at$20\%$

$3,000$

$(2,140)$

$(2,140)$

$(2,140)$

$(2,140)$

$300$

$9$

Unlevered Net Income

$(12,000)$

$8,560$

$8,560$

$8,560$

$8,560$

$(1,200)$