Professor Peter M$.$ DeMarzo, Mizuho Financial Group Professor of Finance prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. While based on an actual case, the data has been simplified for expositional purposes. Copyright $2017$ by the Board of Trustees of the Leland Stanford Junior University. THE NETPHONE PROJECT INTRODUCTION Qualcomm is considering the development of a cordless$/$cellular combo phone that would serve to combine a cordless telephone and a full cellular mobile phone into a single device. The device would combine existing cellular technology $($CDMA$)$ with standard wireless technology protocols $($WiFi$).$ Consumers could use this device in cellular mode when outside the home at regular connection fees and rates $($just like a standard cell phone$).$ But when inside the home or office, the phone would connect through the user$$s WiFi router to the internet and the provider$$s VoIP server to route the call. This would allow the consumer to make calls at VoIP connection fees and rates, which are typically much lower than cellular rates. A $6-$month, $$250,000$ feasibility study for the project has produced the following estimates: Market size, timing and revenue projections The target market for the NetPhone includes upscale residential and business users. Estimates indicate a total potential market of approximately $100$ million users worldwide with the appropriate profile. Ultimate market penetration is expected to be $20\%$ of the available market. $($There is a great deal of uncertainty surrounding this estimate, however, with a best case scenario of $30\%$ and a worst case of $7\mathrm{.}5\%.)$ The product has a life expectancy of $4$ years. After that the technology is likely to become obsolete. Approximately $25\%$ of the total anticipated sales are expected during each of the $4$ years. The projected retail price of the NetPhone is $$70,$ with an average sales price of $$62\mathrm{.}50$ after allowing for typical end retailer $/$ operator discounts and subsidies. Qualcomm will not manufacture or sell the phone itself, but will only provide the core technology; as a result Qualcomm will receive revenue equal to $20\%$ of the average sales price for providing its chipset and software. If launched, the NetPhone is expected to displace sales of certain existing Qualcomm products. Estimates are that, in the absence of the NetPhone, approximately $40\%$ of the anticipated The NetPhone Project p$.2$ customers would have purchased alternative Qualcomm devices with an average sales price $($for Qualcomm content$)$ of $$5$ per unit and an average cost of goods sold of $$3$ per unit. Development cost estimates Developing the new hardware will be relatively expensive as it will involve engineering, testing, and fabrication of combined technologies. Estimates for the required hardware R&D are approximately $$10$ million. Overall, the hardware design and engineering is anticipated to take nine months. An additional $$20$ million will be spent on lab equipment to test the design and verify its implementation and compatibility with existing wifi protocols. This equipment will be installed after product development is completed, and straight line depreciated over the subsequent $4$ years. In addition to the hardware requirements, new software applications must be built for the NetPhone. This software development project requires coordination with each of the service providers and is expected to take a dedicated team of $50$ software engineers a full year to develop. The fully loaded cost of a software engineer is $$250$K per year $($including options expenses$).$ Manufacturing cost estimates Ultimate manufacturing of the product will be outsourced. The contract manufacturer has estimated that the component costs and packaging are expected to be $$6$ per device. Sales, General, and Administrative expenses All aspects of the development of the NetPhone can be housed in existing Qualcomm facilities, so no new facilities will be needed. Once the product is developed, $125$ regional sales and support personnel will be required to provide support for the product as an added responsibility. On average, approximately $10\%$ of their time will be devoted to the NetPhone product. Each full$-$time headcount costs $$200$K per year. In the year prior to the product$$s launch, upfront training of involved personnel will be required. In addition, Qualcomm plans an initial marketing campaign for the NetPhone. A total budget of $$500$K has been allocated for initial training and marketing. Other considerations It is expected that the retailers$/$operators selling this device will demand more favorable terms than usual. Thus, receivables are expected to be $16\%$ of revenues $(60$ days$).$ Furthermore, the contract manufacturer has demanded stricter terms, so that payables will be about $10\%$ of the cost of sales $(36$ days$).$ Incremental profits are subject to a $40\%$ marginal corporate tax rate. In order to benc