Question
You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year 1 increasing by 50,000 units per year over the
You are evaluating the HomeNet project under the following assumptions: Sales of
50,000
units in year 1 increasing by
50,000
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$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 ________
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