You are evaluating the HomeNet project under the following assumptions: Sales of 50,000

units in year 1 increasing by 53,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 10% annually and a year 1 cost of $120/unit decreasing by 22% annually. In addition, new tax laws allow you to 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). Under these assumptions the unlevered net income is shown in the table 1 below

		Year	0	1	2	3	4	5
	HomeNet
	Units Sales (000s)	53		50	103	156	209	-
	Sales Price ($/unit)	10%		260	234	210.6	189.54
	Cost of Goods Sold ($/unit)	22%		120	93.6	73.01	56.95	-
	Operating Expenses ($000s)							-
	Hardware & Software Develop.		(15,000)					-
	Marketing & Technical Support			(2,800)	(2,800)	(2,800)	(2,800)	-
	Capital Expenditures							-
	Lab Equipment		(7,500)					-
	Depreciation			33%	33%	33%	-	-
	Marginal Corporate Tax Rate		40%	40%	40%	40%	40%	-

Suppose that 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.

a. Calculate HomeNet's net working capital requirements (that is, reproduce Table below) Round to the nearest thousand dollars.)

HomeNet's Net Working Capital Requirements
		Year	0	1	2	3	4	5
Net Working Capital Forecast ($000)
1	Cash Requirements		-	-	-	-	-	-
2	Inventory		-	-	-	-	-	-
3	Receivables (15% of sales)		-	3,525	3,525	3,525	3,525	-
4	Payable (15% of COGS)		-	(1,425)	(1,425)	(1,425)	(1,425)	-
5	Net Working Capital		-	2,100	2,100	2,100	2,100	-

b. Calculate HomeNet's FCF (that is, reproduce Table below under the same assumptions). (Round to the nearest thousand dollars.)

Calculation of HomeNet's Free Cash Flow
		Year	0	1	2	3	4	5
Incremental Earnings Forecast ($000)
1	Sales		-	23,000	23,000	23,000	23,000	-
2	Cost of Goods Sold		-	(9,500)	(9,500)	(9,500)	(9,500)	-
3	Gross Profits		-	14,000	14,000	14,000	14,000	-
4	Selling, General, and Administrative		-	(3,000)	(3,000)	(3,000)	(3,000)	-
5	Research and Development		(15,000)	-	-	-	-	-
6	Depreciation		-	(1,500)	(1,500)	(1,500)	(1,500)	(1,500)
7	EBIT		(15,000)	9,500	9,500	9,500	9,500	(1,500)
8	Income Tax at 40%		6,000	(3,800)	(3,800)	(3,800)	(3,800)	600
9	Unlevered Net Income		(9,000)	5,700	5,700	5,700	5,700	(900)
Free Cash Flow (000s)
10	Plus: Depreciation		-	1,500	1,500	1,500	1,500	1,500
11	Less: Capital Expenditures		(7,500)	-	-	-	-	-
12	Less: Increases in NWC		-	(2,100)	-	-	-	-
13	Free Cash Flow		(16,500)	5,100	7,200	7,200	7,200	2,700