Question
I'm having a hard time answering this question in a microsoft excell format After looking at the projections of the HomeNet project, you decide that
I'm having a hard time answering this question in a microsoft excell format
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 50,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 10% annually and a year 1 cost of $120/unit decreasing by 20% 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 in Year 0).
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. The existing router's price will decrease by 10% annually and its cost will decrease by 20% annually as well.
The used equipment that Cisco purchased for $7.5 in Year 0 is sold in Year 5 for a salvage value of $0.5 million.
Other assumptions remain the same, including lost rental and 4% inflation in SG&A expenses.
a. Keeping the other assumptions that underlie Table 8.3 the same, recalculate unlevered net income (that is, reproduce Table 8.3 under the new assumptions. Please note that cannibalization and lost rent must be included. (1 point)
b. Calculate HomeNets net working capital requirements under the new assumptions. (1 point)
c. Calculate HomeNets FCF under the new assumptions. (1 point)
d. Should the project be taken or rejected based on NPV rule under the assumptions? Please show me your calculation. Simply answering yes or no will earn 0 credit. (1 point)
e. Should the project be still taken if the unit sales is 20% lower than originally expected under the new assumptions? Please show me your calculation. Simply answering yes or no will earn 0 credit. (1 point)
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