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 50,000 units in year 1 increasing by 52,000 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 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 8.1 the same, recalculate unlevered net income (that is, reproduce Table 8.1 under the new assumptions, and note that we are ignoring cannibalization and lost rent).

b. Recalculate unlevered net income including lost rent and assuming 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.

Year 0 1 2 3 4 5 Incremental Earnings Forecast (5000) 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 26,000 26,000 26,000 26,000 (11,000) (11,000) (11,000) (11,000) 15,000 15,000 15,000 15,000 (2,800) (2,800) (2,800) (2,800) (15,000) (15,000) 3,000 (12,000) (1,500) 10,700 (2,140) 8,560 (1,500) 10,700 (2,140) 8,560 (1,500) 10.700 (2,140) 8,560 (1,500) 10,700 (2,140) 8,560 (1,500) (1,500) 300 (1,200) a. Keeping the other assumptions that underlie Table 8.1 (69) the same, recalculate unlevered net income (that is, reproduce Table 8.1 under the new assumptions, and note that we are ignoring cannibalization and lost rent). Calculate the yearly unlevered net income below: (Round to the nearest dollar.) Year 0 Incremental Earnings Forecast (5000) Sales $ $ $ $ Cost of Goods Sold Gross Profits Selling, General, and Admin. Research and Development Depreciation EBIT $ $ $ Income Tax at 20% $ Unlevered Net Income $1 Year 0 1 2 3 4 5 Incremental Earnings Forecast (5000) 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 26,000 26,000 26,000 26,000 (11,000) (11,000) (11,000) (11,000) 15,000 15,000 15,000 15,000 (2,800) (2,800) (2,800) (2,800) (15,000) (15,000) 3,000 (12,000) (1,500) 10,700 (2,140) 8,560 (1,500) 10,700 (2,140) 8,560 (1,500) 10.700 (2,140) 8,560 (1,500) 10,700 (2,140) 8,560 (1,500) (1,500) 300 (1,200) a. Keeping the other assumptions that underlie Table 8.1 (69) the same, recalculate unlevered net income (that is, reproduce Table 8.1 under the new assumptions, and note that we are ignoring cannibalization and lost rent). Calculate the yearly unlevered net income below: (Round to the nearest dollar.) Year 0 Incremental Earnings Forecast (5000) Sales $ $ $ $ Cost of Goods Sold Gross Profits Selling, General, and Admin. Research and Development Depreciation EBIT $ $ $ Income Tax at 20% $ Unlevered Net Income $1