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 51,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 9% annually and a year 1 cost of $120/unit decreasing by 19% 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? 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 $. (Round to the nearest thousand dollars.) b. What is the IRR of the project in this case? The IRR is %. (Round to one decimal place.) Year 2 3 5 51 9% 19% 50 260 120 101 236.60 97.20 152 215.31 78.73 203 195.93 63.77 HomeNet Units Sales (000s) Sales Price ($/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 1 2 3 5 13,000 (6,000) 7,000 (2,800) 23,897 32,727 39,774 (9,817) (11,967) (12,945) 14,080 20,760 26,829 (2,800) (2,800) (2,800) ncremental 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) (15,000) (7,500) (22,500) 4,500 (18,000) 4,200 (840) 3,360 11,280 (2,256) 9,024 17,960 (3,592) 14,368 24,029 (4,806) 19,223 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 (1,062) 7,962 (1,002) 13,366 (910) 18,313 (18,000) 4,024 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 51,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 9% annually and a year 1 cost of $120/unit decreasing by 19% 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? 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 $. (Round to the nearest thousand dollars.) b. What is the IRR of the project in this case? The IRR is %. (Round to one decimal place.) Year 2 3 5 51 9% 19% 50 260 120 101 236.60 97.20 152 215.31 78.73 203 195.93 63.77 HomeNet Units Sales (000s) Sales Price ($/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 1 2 3 5 13,000 (6,000) 7,000 (2,800) 23,897 32,727 39,774 (9,817) (11,967) (12,945) 14,080 20,760 26,829 (2,800) (2,800) (2,800) ncremental 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) (15,000) (7,500) (22,500) 4,500 (18,000) 4,200 (840) 3,360 11,280 (2,256) 9,024 17,960 (3,592) 14,368 24,029 (4,806) 19,223 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 (1,062) 7,962 (1,002) 13,366 (910) 18,313 (18,000) 4,024