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 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).

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?

200 - 280 234.00 210.60 189.64 Cost of Goods Sold (SMunit) s (3000s) Hardware & Software Develop. (2,800) 2,800) (2,800 ,800 Marginal Corporate Tax Rate 40% Incremental Eamings Forecast (S000) 13,000 23,400 31,590 37,908 6,000 9,380) (10,962) 11,390) 7,000 14,040 20,838 28,518 (2,800) (2800 (2,800 ,800 2 Cost of Goods Sold 4 Selling. General, and Administrative 1,000 ,700 8,740 15,338 23,718 6,000 (680) (3,496) (6,135) 9,487) 9,000) 020 5,24 9,203 14,231 8 Income Tax at 40% Free Cash Flow ($000) 12 Less: Increases in NWC 13 Free Cash Flow 16,500 2,470 6,688 10,713 13,360 3,977