You are evaluating the HomeNet project under the following assumptions: new tax laws allow 100% bonus depreciation (all the depreciation expense, $ 7.5 million, occurs when the asset is put into use, in this case immediately). 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 12%, calculate:

a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 50,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $ 120 decreases by 22 % annually. See Table 1 (below)

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 11 % annually and the year 1 cost of $ 120/unit decreases by 22% annually. See Table below

(Please show excel formulas on how its calculated) Thanks

Year 0 2 3 4 5 50 11% 22% 50 260 120 100 231.40 93.60 150 205.95 73.01 200 183.30 56.95 HomeNet Units Sales (000s) Sales Price ($/unit) Cost of Goods Sold (S/unit) Operating Expenses (5000s) Hardware & Software Develop. Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Corporate Tax Rate (15,000) (2,800) (2,800) (2.800) (2,800) (7,500) 100% 20% 20% 20% 20% 20% Year 0 1 2 3 4 5 13,000 (6,000) 7,000 (2,800) 23,140 30,893 36,660 (9,360) (10,952) (11,390) 13,780 19,941 25,270 (2,800) (2,800) (2,800) 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 20% 9 Unlevered Net Income Free Cash Flow ($000) 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (15,000) (7,500) (22,500) 4,500 (18,000) 4,200 (840) 3,360 10,980 (2,196) 8,784 17,141 (3,428) 13,713 22,470 (4,494) 17,976 7,500 (7,500) (1,050) 2,310 (1,017) 7,767 (924) 12,789 (799) 17,177 3,790 (18,000) 0 Year 1 2 3 4 5 (18,000) 2,310 7,767 12,789 17,177 3,790 Net Present Value (5000) 1 Free Cash Flow 2 Project Cost of Capital 12% 3 Discount Factor 4 PV of Free Cash Flow 5 NPV 1.000 (18,000) 12,424 0.8929 2,063 0.7972 6,192 0.7118 9,103 0.6355 10,916 0.5674 2,150 Year 0 2 3 4 5 50 11% 22% 50 260 120 100 231.40 93.60 150 205.95 73.01 200 183.30 56.95 HomeNet Units Sales (000s) Sales Price ($/unit) Cost of Goods Sold (S/unit) Operating Expenses (5000s) Hardware & Software Develop. Marketing & Technical Support Capital Expenditures Lab Equipment Depreciation Corporate Tax Rate (15,000) (2,800) (2,800) (2.800) (2,800) (7,500) 100% 20% 20% 20% 20% 20% Year 0 1 2 3 4 5 13,000 (6,000) 7,000 (2,800) 23,140 30,893 36,660 (9,360) (10,952) (11,390) 13,780 19,941 25,270 (2,800) (2,800) (2,800) 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 20% 9 Unlevered Net Income Free Cash Flow ($000) 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (15,000) (7,500) (22,500) 4,500 (18,000) 4,200 (840) 3,360 10,980 (2,196) 8,784 17,141 (3,428) 13,713 22,470 (4,494) 17,976 7,500 (7,500) (1,050) 2,310 (1,017) 7,767 (924) 12,789 (799) 17,177 3,790 (18,000) 0 Year 1 2 3 4 5 (18,000) 2,310 7,767 12,789 17,177 3,790 Net Present Value (5000) 1 Free Cash Flow 2 Project Cost of Capital 12% 3 Discount Factor 4 PV of Free Cash Flow 5 NPV 1.000 (18,000) 12,424 0.8929 2,063 0.7972 6,192 0.7118 9,103 0.6355 10,916 0.5674 2,150