You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year 1 increasing by 49,000 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 20% 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). 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

Year 0 1 2 3 45

HomeNet

Units Sales (000s) 49 50 99 148 197 -

Sales Price ($/unit) 10% 260 234.00 210.60 189.54

Cost of Goods Sold ($/unit) 20% 120 96.00 76.8061.44 -

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% -

Year0 1 2 3 4 5

Incremental Earnings

Forecast ($000)

1 Sales - 13,000 23,16631,169 37,339 -

2 Cost of Goods Sold -(6,000)( 9,504) (11,366) (12,104) - 3 Gross Profits- 7,000 13,662 19,803 25,235 -

4 Selling, General, and

Administrative - (2,800) (2,800) (2,800) (2,800) -

5 Research and

Development(15,000) - - - - -

6 Depreciation - (2,500) (2,500) (2,500) - -

7 EBIT (15,000) 1,700 8,362 14,503 22,435 -

8 Income Tax at 40% 6,000 (680) (3,345) (5,801) (8,974) -

9 Unlevered Net Income (9,000) 1,020 5,017 8,702 13,461 -

Free Cash Flow ($000)

10 Plus: Depreciation - 2,500 2,500 2,500 - -

11 Less: Capital

Expenditures (7,500) - - - - -

12 Less: Increases in NWC (1,050) (999) (921) (815)

13 Free Cash Flow(16,500) 2,470 6,518 10,281 12,6463,785

Using the FCF projections given:

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

The NPV of the FCF's of the HomeNet project assuming a cost of capital of 10%is ?????. (Round to the nearest thousand dollars.)

The NPV of the FCF's of the HomeNet project assuming a cost of capital of 12% is ??? . (Round to the nearest thousand dollars.)

The NPV of the FCF's of the HomeNet project assuming a cost of capital of 14% is ??? . (Round to the nearest thousand dollars.)

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

The IRR is?? %. (Round to one decimal place.)