Year 1 2 3 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold ($/unit) Operating Expenses ($000s) Hardware & Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate lax Rate 45 15% 20% 185 260 221.00 87.85 159.67 61.44 50 95 140 120 96.00 76.80 (15,000) (2,800) (2,800) (2,800) (2,800) (7,500) 33.33% 40% 33.33% 40% 33.33% 40% 40% 40% Year 2 Incremental Earnings Forecast ($000) 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 40% 9 Unlevered Net Income 13,000 20,99526,29929,539 6,000 (9,120) (10,752) (11,366) 7,000 (2,800) (2,800) (2,800) (2,800) 11,875 15,547 18,173 (15,000) (2,500) (2,500) (2,500) (15,000) 6,000 (9,000) 1,700 (680) (2,630 (4,099)(6,149) 1,020 6,575 3,945 2,500 (731) 10,247 6,148 2,500 (551) 15,373 9,224 Free Cash Flow ($000) 2,500 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (7,500) 1,050) (394) 16,500 2,470 5,7148,0978,830 2,726 Year Net Present Value ($000) 2,470 1 2 3 4 5 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow NPV (16,500) 5,714 8,097 8,830 2,726 1.000 (16,500) 2,173 0.8772 2,167 0.7695 0.67500.5921 0.5194 4,397 5,465 5,228 1,416 Year 2 4 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold (S/unit) Operating Expenses ($000s) Hardware &Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate Tax Rate 45 15% 25% 95 260221.00 96.00 140 187.85 1 76.80 50 185 159.67 61.44 120 (15,000) (2,800) (2,800) (2,800) 2,800) (7,500) 33.33% 40% 33.33% 40% 33.33% 40% 40% 40% Year 5 Incremental Earnings Forecast ($000) 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 40% 9 Unlevered Net Income 13,000 20,99526,29929,53 (6,000) (9,120) (10,752) 11,366) 7,000 11,875 18,173 (2,800 (2,800) (2,800) 2,800) 15,547 (15,000)- (2,500) (2,500) (2,500) 15,000 1,700 6,575 10,24715,373 6,000 (9,000) (680)(2,630) (4,099)(6,149) 1,020 3,945 2,500 (731) 6,148 2,500 (551) 9,224 Free Cash Flow ($000) 2,500 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (7,500) (1,050) 16,500 2,4705,7148,097 8,830 2,726 Year 2 Net Present Value ($000) 1 2 3 4 5 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow NPV (16,500) 2,470 5,714 8,097 8,830 2,726 1.000 (16,500) 2,173 0.8772 2,167 0.7695 0.6750 0.5921 0.5194 4,397 5,465 5,228 1,416 You are evaluating the HomeNet project under the following assumptions: You depreciate the equipment, costing $7.5 million, over three years using straight-line depreciation. Research and development expenditures total $15 million in year 0 and selling, general, and administrative expenses are $2.8 million per year (assuming there is no cannibalization). Also assume HomeNet will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). However, receivables related to HomeNet are expected to account for 15% of annual sales, and payables are expected to be 15% of the annual cost of goods sold. Under these assumptions and assuming a cost of capital of 14%, calculate a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 45,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 20% annually. See b. The break-even annual unit sales increase if: sales are 50,000 units in year 1, the year 1 sales price of $260/unit, decreases by 15% annually and the year 1 cost of $120/unit decreases by 20% annually. See a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 45,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 20% annually. See The break-even annual sales price decline is %. (Round to two decimal places.) b. The break-even annual unit sales increase if: sales are 50,000 units in year 1, the year 1 sales price of $260/unit, decreases by 15% annually and the year 1 cost of $120/unit decreases by 20% annually. See E 3 The break-even annual unit sales increase isunits. (Round to the nearest integer.) Enter your answer in each of the answer boxes Year 1 2 3 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold ($/unit) Operating Expenses ($000s) Hardware & Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate lax Rate 45 15% 20% 185 260 221.00 87.85 159.67 61.44 50 95 140 120 96.00 76.80 (15,000) (2,800) (2,800) (2,800) (2,800) (7,500) 33.33% 40% 33.33% 40% 33.33% 40% 40% 40% Year 2 Incremental Earnings Forecast ($000) 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 40% 9 Unlevered Net Income 13,000 20,99526,29929,539 6,000 (9,120) (10,752) (11,366) 7,000 (2,800) (2,800) (2,800) (2,800) 11,875 15,547 18,173 (15,000) (2,500) (2,500) (2,500) (15,000) 6,000 (9,000) 1,700 (680) (2,630 (4,099)(6,149) 1,020 6,575 3,945 2,500 (731) 10,247 6,148 2,500 (551) 15,373 9,224 Free Cash Flow ($000) 2,500 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (7,500) 1,050) (394) 16,500 2,470 5,7148,0978,830 2,726 Year Net Present Value ($000) 2,470 1 2 3 4 5 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow NPV (16,500) 5,714 8,097 8,830 2,726 1.000 (16,500) 2,173 0.8772 2,167 0.7695 0.67500.5921 0.5194 4,397 5,465 5,228 1,416 Year 2 4 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold (S/unit) Operating Expenses ($000s) Hardware &Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate Tax Rate 45 15% 25% 95 260221.00 96.00 140 187.85 1 76.80 50 185 159.67 61.44 120 (15,000) (2,800) (2,800) (2,800) 2,800) (7,500) 33.33% 40% 33.33% 40% 33.33% 40% 40% 40% Year 5 Incremental Earnings Forecast ($000) 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 40% 9 Unlevered Net Income 13,000 20,99526,29929,53 (6,000) (9,120) (10,752) 11,366) 7,000 11,875 18,173 (2,800 (2,800) (2,800) 2,800) 15,547 (15,000)- (2,500) (2,500) (2,500) 15,000 1,700 6,575 10,24715,373 6,000 (9,000) (680)(2,630) (4,099)(6,149) 1,020 3,945 2,500 (731) 6,148 2,500 (551) 9,224 Free Cash Flow ($000) 2,500 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (7,500) (1,050) 16,500 2,4705,7148,097 8,830 2,726 Year 2 Net Present Value ($000) 1 2 3 4 5 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow NPV (16,500) 2,470 5,714 8,097 8,830 2,726 1.000 (16,500) 2,173 0.8772 2,167 0.7695 0.6750 0.5921 0.5194 4,397 5,465 5,228 1,416 Year 2 3 4 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold ($/unit) Operating Expenses ($000s) Hardware & Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate Tax Rate 50 15% 20% 260221.00 96.00 185 187.85159.67 61.44 120 76.80 (15,000) (2,800) (2,800) (2,800) (2,800) (7,500) 33.33% 33.33% 40% 33.33% 40% 40% 40% Year Incremental Earnings Forecast ($000) 29,539 6,000 (9,120) (10,752) (11,366) 18,173 (2,800) (2,800) (2,800) (2,800) 20,99526,299 1 Sale:s 2 Cost of Goods Sold 3 Gross Profits 4 Selling, General, and Administrative 5 Research and Development 6 Depreciationn 7 EBIT 8 Income Tax at 40% 9 Unlevered Net Income 13,000 7,000 11,875 15,547 (15,000) (2,500) (2,500) (2,500) (15,000) 6,000 (9,000) 1,700 (680) (2,630 (4,099) (6,149) 1,020 6,575 3,945 2,500 (731) 10,247 6,148 2,500 (551) 15,373 9,224 Free Cash Flow ($000) 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow 2,500 (7,500) (1,050) (16,500) 2,470 5,714 8,097 8,830 2,726 Year 2 Net Present Value ($000) (16,500) 1 2 3 4 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow 2,470 5,714 8,097 8,830 2,726 1.000 0.8772 0.7695 0.6750 0.5921 0.5194 4 397 5465 5.228 1416 Year 1 2 3 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold ($/unit) Operating Expenses ($000s) Hardware & Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate lax Rate 45 15% 20% 185 260 221.00 87.85 159.67 61.44 50 95 140 120 96.00 76.80 (15,000) (2,800) (2,800) (2,800) (2,800) (7,500) 33.33% 40% 33.33% 40% 33.33% 40% 40% 40% Year 2 Incremental Earnings Forecast ($000) 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 40% 9 Unlevered Net Income 13,000 20,99526,29929,539 6,000 (9,120) (10,752) (11,366) 7,000 (2,800) (2,800) (2,800) (2,800) 11,875 15,547 18,173 (15,000) (2,500) (2,500) (2,500) (15,000) 6,000 (9,000) 1,700 (680) (2,630 (4,099)(6,149) 1,020 6,575 3,945 2,500 (731) 10,247 6,148 2,500 (551) 15,373 9,224 Free Cash Flow ($000) 2,500 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (7,500) 1,050) (394) 16,500 2,470 5,7148,0978,830 2,726 Year Net Present Value ($000) 2,470 1 2 3 4 5 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow NPV (16,500) 5,714 8,097 8,830 2,726 1.000 (16,500) 2,173 0.8772 2,167 0.7695 0.67500.5921 0.5194 4,397 5,465 5,228 1,416 Year 2 4 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold (S/unit) Operating Expenses ($000s) Hardware &Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate Tax Rate 45 15% 25% 95 260221.00 96.00 140 187.85 1 76.80 50 185 159.67 61.44 120 (15,000) (2,800) (2,800) (2,800) 2,800) (7,500) 33.33% 40% 33.33% 40% 33.33% 40% 40% 40% Year 5 Incremental Earnings Forecast ($000) 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 40% 9 Unlevered Net Income 13,000 20,99526,29929,53 (6,000) (9,120) (10,752) 11,366) 7,000 11,875 18,173 (2,800 (2,800) (2,800) 2,800) 15,547 (15,000)- (2,500) (2,500) (2,500) 15,000 1,700 6,575 10,24715,373 6,000 (9,000) (680)(2,630) (4,099)(6,149) 1,020 3,945 2,500 (731) 6,148 2,500 (551) 9,224 Free Cash Flow ($000) 2,500 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (7,500) (1,050) 16,500 2,4705,7148,097 8,830 2,726 Year 2 Net Present Value ($000) 1 2 3 4 5 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow NPV (16,500) 2,470 5,714 8,097 8,830 2,726 1.000 (16,500) 2,173 0.8772 2,167 0.7695 0.6750 0.5921 0.5194 4,397 5,465 5,228 1,416 You are evaluating the HomeNet project under the following assumptions: You depreciate the equipment, costing $7.5 million, over three years using straight-line depreciation. Research and development expenditures total $15 million in year 0 and selling, general, and administrative expenses are $2.8 million per year (assuming there is no cannibalization). Also assume HomeNet will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). However, receivables related to HomeNet are expected to account for 15% of annual sales, and payables are expected to be 15% of the annual cost of goods sold. Under these assumptions and assuming a cost of capital of 14%, calculate a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 45,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 20% annually. See b. The break-even annual unit sales increase if: sales are 50,000 units in year 1, the year 1 sales price of $260/unit, decreases by 15% annually and the year 1 cost of $120/unit decreases by 20% annually. See a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 45,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 20% annually. See The break-even annual sales price decline is %. (Round to two decimal places.) b. The break-even annual unit sales increase if: sales are 50,000 units in year 1, the year 1 sales price of $260/unit, decreases by 15% annually and the year 1 cost of $120/unit decreases by 20% annually. See E 3 The break-even annual unit sales increase isunits. (Round to the nearest integer.) Enter your answer in each of the answer boxes Year 1 2 3 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold ($/unit) Operating Expenses ($000s) Hardware & Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate lax Rate 45 15% 20% 185 260 221.00 87.85 159.67 61.44 50 95 140 120 96.00 76.80 (15,000) (2,800) (2,800) (2,800) (2,800) (7,500) 33.33% 40% 33.33% 40% 33.33% 40% 40% 40% Year 2 Incremental Earnings Forecast ($000) 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 40% 9 Unlevered Net Income 13,000 20,99526,29929,539 6,000 (9,120) (10,752) (11,366) 7,000 (2,800) (2,800) (2,800) (2,800) 11,875 15,547 18,173 (15,000) (2,500) (2,500) (2,500) (15,000) 6,000 (9,000) 1,700 (680) (2,630 (4,099)(6,149) 1,020 6,575 3,945 2,500 (731) 10,247 6,148 2,500 (551) 15,373 9,224 Free Cash Flow ($000) 2,500 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (7,500) 1,050) (394) 16,500 2,470 5,7148,0978,830 2,726 Year Net Present Value ($000) 2,470 1 2 3 4 5 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow NPV (16,500) 5,714 8,097 8,830 2,726 1.000 (16,500) 2,173 0.8772 2,167 0.7695 0.67500.5921 0.5194 4,397 5,465 5,228 1,416 Year 2 4 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold (S/unit) Operating Expenses ($000s) Hardware &Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate Tax Rate 45 15% 25% 95 260221.00 96.00 140 187.85 1 76.80 50 185 159.67 61.44 120 (15,000) (2,800) (2,800) (2,800) 2,800) (7,500) 33.33% 40% 33.33% 40% 33.33% 40% 40% 40% Year 5 Incremental Earnings Forecast ($000) 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 40% 9 Unlevered Net Income 13,000 20,99526,29929,53 (6,000) (9,120) (10,752) 11,366) 7,000 11,875 18,173 (2,800 (2,800) (2,800) 2,800) 15,547 (15,000)- (2,500) (2,500) (2,500) 15,000 1,700 6,575 10,24715,373 6,000 (9,000) (680)(2,630) (4,099)(6,149) 1,020 3,945 2,500 (731) 6,148 2,500 (551) 9,224 Free Cash Flow ($000) 2,500 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (7,500) (1,050) 16,500 2,4705,7148,097 8,830 2,726 Year 2 Net Present Value ($000) 1 2 3 4 5 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow NPV (16,500) 2,470 5,714 8,097 8,830 2,726 1.000 (16,500) 2,173 0.8772 2,167 0.7695 0.6750 0.5921 0.5194 4,397 5,465 5,228 1,416 Year 2 3 4 HomeNet Units Sales (000s) Sales Price (S/unit) Cost of Goods Sold ($/unit) Operating Expenses ($000s) Hardware & Software Develop Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Marginal Corporate Tax Rate 50 15% 20% 260221.00 96.00 185 187.85159.67 61.44 120 76.80 (15,000) (2,800) (2,800) (2,800) (2,800) (7,500) 33.33% 33.33% 40% 33.33% 40% 40% 40% Year Incremental Earnings Forecast ($000) 29,539 6,000 (9,120) (10,752) (11,366) 18,173 (2,800) (2,800) (2,800) (2,800) 20,99526,299 1 Sale:s 2 Cost of Goods Sold 3 Gross Profits 4 Selling, General, and Administrative 5 Research and Development 6 Depreciationn 7 EBIT 8 Income Tax at 40% 9 Unlevered Net Income 13,000 7,000 11,875 15,547 (15,000) (2,500) (2,500) (2,500) (15,000) 6,000 (9,000) 1,700 (680) (2,630 (4,099) (6,149) 1,020 6,575 3,945 2,500 (731) 10,247 6,148 2,500 (551) 15,373 9,224 Free Cash Flow ($000) 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow 2,500 (7,500) (1,050) (16,500) 2,470 5,714 8,097 8,830 2,726 Year 2 Net Present Value ($000) (16,500) 1 2 3 4 Free Cash Flow Project Cost of Capital 14% Discount Factor PV of Free Cash Flow 2,470 5,714 8,097 8,830 2,726 1.000 0.8772 0.7695 0.6750 0.5921 0.5194 4 397 5465 5.228 1416