You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year 1 increasing by 52,000 units per year over the life of theproject, a year 1 sales price of $260/unit, decreasing by 9% 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 million per year (assuming there is no cannibalization). Under these assumptions the unlevered net income is shown in the table:

a. Calculate HomeNet's net working capital requirements (that is, reproduce Table 8.4 under the assumptions given).

The net working capital for year 1 is $_____. (Round to the nearest thousand dollars.) The net working capital for year 2 i $______. (Round to the nearest thousand dollars.) The net working capital for year 3 is $_____. (Round to the nearest thousand dollars.) The net working capital for year 4 is $_____. (Round to the nearest thousand dollars.) The net working capital for year 5 is $_____.(Round to the nearest thousand dollar.)

b. Calculate HomeNet's FCF (that is, reproduce Table 8.3 under the same assumptions).

The free cash flow for year 0 is $_____. (Round to the nearest thousand dollars.) The free cash flow for year 1 is $_____. (Round to the nearest thousand dollars.) The free cash flow for year 2 is $_____. (Round to the nearest thousand dollars.) The free cash flow for year 3 is $_____. (Round to the nearest thousand dollars.) The free cash flow for year 4 is $_____. (Round to the nearest thousand dollars.) The free cash flow for year 5 is $_____. (Round to the nearest thousand dollars.)

		Year	0	1	2	3	4	5
	HomeNet
	Units Sales (000s)	52		50	102	154	206	-
	Sales Price ($/unit)	9%		260	236.6	215.31	195.93
	Cost of Goods Sold ($/unit)	20%		120	96	76.8	61.44	-
	Operating Expenses ($000s)							-
	Hardware & Software Develop.		(15,000)					-
	Marketing & Technical Support			(2,800)	(2,800)	(2,800)	(2,800)	-
	Capital Expenditures							-
	Lab Equipment		(7,500)					-
	Depreciation			33%	33%	33%	-	-
	Marginal Corporate Tax Rate		40%	40%	40%	40%	40%	-

		Year	0	1	2	3	4	5
Incremental Earnings Forecast ($000)
1	Sales		-	13000	24133	33158	40362	-
2	Cost of Goods Sold		-	(6,000)	(9,792)	(11,827)	(12,657)	-
3	Gross Profits		-	7000	14341	21331	27705	-
4	Selling, General, and Administrative		-	(2,800)	(2,800)	(2,800)	(2,800)	-
5	Research and Development		(15,000)	-	-	-	-	-
6	Depreciation		-	(2,500)	(2,500)	(2,500)	-	-
7	EBIT		(15,000)	1700	9041	16031	24905	-
8	Income Tax at 40%		6000	(680)	(3,616)	(6,412)	(9,962)	-
9	Unlevered Net Income		(9,000)	1020	5425	9619	14943	-

Suppose that 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. a. Calculate HomeNet's net working capital requirements (that is, reproduce Table 8.4 under the assumptions given).

HomeNets Net Working Capital Requirements
		Year	0	1	2	3	4	5
Net Working Capital Forecast ($000)
1	Cash Requirements		-	-	-	-	-	-
2	Inventory		-	-	-	-	-	-
3	Receivables (15% of sales)		-	3525	3525	3525	3525	-
4	Payable (15% of COGS)		-	(1,425)	(1,425)	(1,425)	(1,425)	-
5	Net Working Capital		-	2100	2100	2100	2100	-

b. Calculate HomeNet's FCF (that is, reproduce Table 8.3 under the same assumptions).

Calculation of HomeNets Free Cash Flow (Including Cannibalization and Lost Rent)
		Year	0	1	2	3	4	5
Incremental Earnings Forcast ($000)
1	Sales		-	23000	23000	23000	23000	23000
2	Cost of Goods Sold		-	(9,500)	(9,500)	(9,500)	(9,500)	(9,500)
3	Gross Profits		-	14000	14000	14000	14000	14000
4	Selling, General, and Administrative		-	(3,000)	(3,000)	(3,000)	(3,000)	(3,000)
5	Research and Development		(15,000)	-	-	-	-	-
6	Depreciation		-	(1,500)	(1,500)	(1,500)	(1,500)	(1,500)
7	EBIT		(15,000)	9500	9500	9500	9500	9500
8	Income Tax at 40%		6000	(3,800)	(3,800)	(3,800)	(3,800)	600
9	Unlevered Net Income		(9,000)	5700	5700	5700	5700	5700
Free Cash Flow (000s)
10	Plus: Depreciation		-	1500	1500	1500	1500	1500
11	Less: Capital Expenditures		(7,500)	-	-	-	-	-
12	Less: Increases in NWC		-	(2,100)
13	Free Cash Flow		(16,500)	5100	5100	5100	5100	5100