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 14%, calculate: a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 53,000 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 19% 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 9% annually and the year 1 cost of $120/unit decreases by 19% annually. See a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 53,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 19% annually. See 5. The break-even annual sales price decline is %. (Round to two decimal places.) Year 0 N 2 3 4 5 53 9% 19% 50 260 120 103 236.60 97.20 156 215.31 78.73 209 195.93 63.77 HomeNet Units Sales (000s) Sales Price ($/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 emental Earnings Forecast ($000) Sales Cost of Goods Sold 13,000 24,370 33,588 40,949 (6,000) (10,012) (12,282) (13,328) 13,000 (6,000) 7,000 (2,800) 24,370 33,588 40,949 (10,012) (12,282) (13,328) 14,358 21,306 27,621 (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 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 11,558 (2,312) 9,246 18,506 (3,701) 14,805 24,821 (4,964) 19,857 7,500 (7,500) (1,050) 2,310 (1,104) 8,142 (1,042) 13,763 (947) 18,910 (18,000) 4 Year 0 1 2 3 4 5 (7,500) (22,500) 4,500 (18,000) 4,200 (840) 3,360 11,558 (2,312) 9,246 18,506 (3,701) 14,805 24,821 (4,964) 19,857 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 7,500 (7,500) (1,050) 2,310 (1,104) 8,142 (1,042) 13,763 (947) 18,910 (18,000) Year 0 1 2 3 4 5 (18,000) 2,310 8,142 13,763 18,910 4, Net Present Value ($000) 1 Free Cash Flow 2 Project Cost of Capital 14% 3 Discount Factor 4 PV of Free Cash Flow 5 NPV 0.5 1.000 (18,000) 12,930 0.8772 2,026 0.7695 6,265 0.6750 9,290 0.5921 11,197 2. 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 14%, calculate: a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 53,000 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 19% 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 9% annually and the year 1 cost of $120/unit decreases by 19% annually. See a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 53,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 19% annually. See 5. The break-even annual sales price decline is %. (Round to two decimal places.) Year 0 N 2 3 4 5 53 9% 19% 50 260 120 103 236.60 97.20 156 215.31 78.73 209 195.93 63.77 HomeNet Units Sales (000s) Sales Price ($/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 emental Earnings Forecast ($000) Sales Cost of Goods Sold 13,000 24,370 33,588 40,949 (6,000) (10,012) (12,282) (13,328) 13,000 (6,000) 7,000 (2,800) 24,370 33,588 40,949 (10,012) (12,282) (13,328) 14,358 21,306 27,621 (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 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 11,558 (2,312) 9,246 18,506 (3,701) 14,805 24,821 (4,964) 19,857 7,500 (7,500) (1,050) 2,310 (1,104) 8,142 (1,042) 13,763 (947) 18,910 (18,000) 4 Year 0 1 2 3 4 5 (7,500) (22,500) 4,500 (18,000) 4,200 (840) 3,360 11,558 (2,312) 9,246 18,506 (3,701) 14,805 24,821 (4,964) 19,857 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 7,500 (7,500) (1,050) 2,310 (1,104) 8,142 (1,042) 13,763 (947) 18,910 (18,000) Year 0 1 2 3 4 5 (18,000) 2,310 8,142 13,763 18,910 4, Net Present Value ($000) 1 Free Cash Flow 2 Project Cost of Capital 14% 3 Discount Factor 4 PV of Free Cash Flow 5 NPV 0.5 1.000 (18,000) 12,930 0.8772 2,026 0.7695 6,265 0.6750 9,290 0.5921 11,197 2