Linksys is considering the development of a wireless home networking appliance called HomeNet that will provide both the hardware and the software necessary to run an entire home from any Internet connection. In addition to connecting PCs and printers, HomeNet will control new Internet-capable stereos, digital video recorders, heating and air-conditioning units, major appliances, telephone and security systems, office equipment, and so on. The major competitor for Home Net is a product being developed by Brandt-Quigley Corporation.

Based on extensive marketing surveys, the sales forecast for HomeNet is 50,000 units per year. Given the pace of technological change, Linksys expects the product will have a four-year life and an expected wholesale price of $260 (the price Linksys will receive from stores). Actual production will be outsourced at a cost (including packaging) of $110 per unit.

To verify the compatibility of new consumer Internet-ready appliances, as they become available with the HomeNet system, Linksys must also establish a new lab for testing purposes. It will rent the lab space but will need to purchase $7.5 million of new equipment. The equipment will be depreciated using the straight-line method over a five-year life.

The lab will be operational at the end of one year. At that time, HomeNet will be ready to ship. Linksys expects to spend $2.8 million per year on rental costs for the lab space, as well as marketing and support for this product.

Forecast the incremental earnings from the HomeNet Project.

1. Incremental Revenues: additional units sold x price
2. Incremental Costs: additional units sold x production costs
3. Depreciation: Depreciable base/Depreciable life
4. Marginal Tax Rate: 40%

YEAR: 0 1 2 3 4 5

Revenues

Cost of Goods Sold

Gross ProfitSelling,

General,

Administrative

Depreciation

EBITIncome

Tax at 40%

Incremental Earnings