You are evaluating the HomeNet project under the following assumptions: new tax laws allow 100% bonus depreciation (all the depreciation expense, $120 million, occurs when the asset is put into use, in this case immediately). Sales of 50,000 units in year 1 increasing by 48,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 11% annually and a year 1 cost of $120/unit decreasing by 20% annually. In addition, new tax laws allow 100% bonus depreciation (all the depreciation expense 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 the unlevered net income, net working capital requirements and free cash flow are shown in the Table Using the FCF projections given:

a. Calculate the NPV of the HomeNet project assuming a cost of capital of 10%, 12% and 14%.

b. What is the IRR of the project in this case?

Free Cash Flow Table Year 0 1 2 3 4 5 48 11% 20% 50 260 120 98 231.40 96.00 146 205.95 76.80 194 183.30 61.44 HomeNet Units Sales (000s) Sales Price ($/unit) Cost of Goods Sold ($/unit) Operating Expenses ($000s) 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) 22,677 30,069 35,560 (9,408) (11,213) (11,919) 13,269 18,856 23,641 (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 ($000) 10 Plus: Depreciation 11 Less: Capital Expenditures 12 Less: Increases in NWC 13 Free Cash Flow (15,000) (7,500) (22,500) 4,500 (18,000) 4,200 (840) 3,360 10,469 (2,094) 8,375 16,056 (3,211) 12,845 20,841 (4,168) 16,673 7,500 (7,500) (1,050) 2,310 (941) 7,434 (837) 12,008 (718) 15,955 (18,000) 3,546 Free Cash Flow Table Year 0 1 2 3 4 5 48 11% 20% 50 260 120 98 231.40 96.00 146 205.95 76.80 194 183.30 61.44 HomeNet Units Sales (000s) Sales Price ($/unit) Cost of Goods Sold ($/unit) Operating Expenses ($000s) 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) 22,677 30,069 35,560 (9,408) (11,213) (11,919) 13,269 18,856 23,641 (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 10,469 (2,094) 8,375 16,056 (3,211) 12,845 20,841 (4,168) 16,673 7,500 (7,500) (1,050) 2,310 (941) 7,434 (837) 12,008 (718) 15,955 (18,000) 3,546