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 competingproducts, 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 50,000 units in year 1 increasing by 48,000

units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 11% annually and a year 1 cost of $120/unit decreasing by 21% annually. In addition, new tax laws allow you to depreciate the equipment, costing $7.5 million over three rather than five years using straight-line depreciation.

a. Keeping the underlying assumptions in Table 1 (

Click on the Icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

		Year	0	1	2	3	4	5
Incremental Earnings Forecast ($000)
1	Sales		-	26,000	26,000	26,000	26,000	-
2	Cost of Goods Sold		-	(11,000)	(11,000)	(11,000)	(11,000)	-
3	Gross Profits		-	15,000	15,000	15,000	15,000	-
4	Selling, General, and Administrative		-	(2,800)	(2,800)	(2,800)	(2,800)	-
5	Research and Development		(15,000)	-	-	-	-	-
6	Depreciation		-	(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 40%		6,000	(4,280)	(4,280)	(4,280)	(4,280)	600
9	Unlevered Net Income		(9,000)	6,420	6,420	6,420	6,420	(900)

) 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%

of sales comes from customers who would have purchased an existing Cisco router for $100/unit

and that this router costs $60/unit to manufacture.