Inputs (all costs as of time 1 dollars, other than Capex, which is as of time 0 dollars)	Outputs
Discount Rate	10.0%		NPV	11,857
Inflation	3.0%		IRR	87.6%
Annual Units Produced and Sold	120,000		Scenario
Revenue per Unit	$ 225.00		We are considering developing a new home security system called HomeFront. We are using this spreadsheet to help us decide. If we go ahead, we will cannibalize our older Castle systems, by costing us the percentage of unit sales listed in the Inputs. But the marketing team says that two-thirds of those cannibalized sales will be lost anyway, since our competitors are introducing new products as well. On the upside, there would be less repair cost on those lousy Castle systems, which is costing as of time 1 $5 per unit per year. We paid some consultants to do a research study. The total cost is listed in the Inputs, which we owe at time 1. If we choose not to go ahead with this project, we get a 15% discount off of what we owe at time 1. But in any case, under current tax regulations, we can amortize any research cost that we actually spend for tax purposes with straight-line amortization at the life listed in the Inputs, starting at time 2. Because of the intense competition, we'll only be able to sell the HomeFront product for the next 4 years. We'll have to spend on marketing for that timeframe (cost you see in inputs), and then our customers will need support as well (cost you see in inputs as long as any customers need support). We expect customers will be using these products for 15 years after they buy them. We anticipate the necessary cash, receivables, payables and inventory to be the % of sales (or COGS) listed in the Inputs. The good news is we have excess cash that is unused right now, so I zeroed out required cash, which would otherwise been the percentage given in the Inputs. Once production and selling cease (even if there are still customers using the products), we will be able to recover the additional working capital requirements a year later. We'll have some upfront costs of capital expenditures for equipment (see Inputs). We can depreciate the equipment cost for tax purposes for the life listed in the inputs. We also need to hire some engineers on a 1-year contract, where we pay them at time 1. One bright spot in all this is that we have unused office space that for some reason was just sitting there. Otherwise, we would have to pay $100k per year every year we produced, sold, or supported customers starting at time 1. Manager Note: (1) Need to add in inflation. Assume constant inflation in Inputs for all costs and revenue.
Production Cost per Unit	$ 100.00
Research Study Cost	$ 1,200
Amortization Life	4
Engineers Needed	50
Engineer Contract Salary	$ 200,000
Marketing	$ 1,500
Customer Support	$ 1,500
Rent	$ 100
Equipment Capital Expenditure (time 0)	$ 8,000
Depreciable Life (Straight-Line)	4
Marginal Tax Rate	25%
Working Capital Assumptions
Required Cash as % of Sales	5%
Receivables as % of Sales	25%
Payables as % of COGS	25%
Inventories as % of Sales	0%
Cannibalization of Castle Systems
Percentage of Unit Sales Cannibalized	25%
Wholesale Price of Old Units	$ 100.00
Production Cost Per Unit of Old Units	$ 60.00