You are evaluating the HomeNet project under the following assumptions: Sales of

50 comma 00050,000

units in year 1 increasing by

53 comma 00053,000

units per year over the life of the project, a year 1 sales price of

$ 260$260/unit,

decreasing by

10 %10%

annually and a year 1 cost of

$ 120$120/unit

decreasing by

19 %19%

annually. In addition, new tax laws allow you to depreciate the equipment, costing

$ 7.5$7.5

million, over three years using straight-line depreciation. Research and development expenditures total

$ 15$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 %15%

of annual sales, and payables are expected to be

15 %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

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. Using the FCF projections given:

a. Calculate the NPV of the HomeNet project assuming a cost of capital of

10 %10%,

12 %12%

and

14 %14%.

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