You are evaluating the HomeNet project under the following assumptions: You 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 and assuming a cost of capital of 12%, calculate:

a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 52,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 20% annually. (see chart)

The break-even annual sales price decline is ( ? ) %. (round to two decimal places)

b. The break-even annual unit sales increase if: sales are 50,000 units in year 1, the year 1 sales price of $260/unit, decrease by 21.8% annually and the year 1 cost of $120/unit decreases by 20% annually. (see chart)

The break-even annual sales increas is ( ? ) units. (round to nearest integer)

			Year	0	1	2	3	4	5
HomeNet
Unit Sales ($000s)			52		50	102	154	206	-
Sales Price ($/unit)			21.80%		260	203.32	159	124.34	-
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 Earning Forcast ($000s)
1.) Sales				-	13,000	20,739	24,486	25,614	-
2.) Cost of Goods Sold				-	-6,000	-9,792	-11,827	-12,657	-
3.) Gross Profits				-	7,000	10,947	12,659	12,957	-
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	1,700	5,647	7,359	10,157	-
8.) Income Tax at 40%				6,000	-680	-2,259	-2,944	-4,063	-
9.) Unlevered Net Income				-9,000	1,020	3,388	4,415	6,094	-
Free Cash Flow ($000s)
10.) Plus: Depreciation					2,500	2,500	2,500
11.) Less: Capital Expenditures				-7,500
12.) Less: Increases in NWC					-1,050	-592	-257	-44
13.) Free Cash Flow				-16,500	2,470	5,296	6,658	6,050	1,943
			Year	0	1	2	3	4	5
Net Present Value ($000s)
1.) Free Cash Flow				-16,500	2,470	5,296	6,658	6,050	1,943
2.) Project Cost of Capital 12%
3.) Discount Factor				1.000	0.8929	0.7972	0.7118	0.6355	0.5674
4.) PV of Free Cash Flow				-16,500	2,205	4,222	4,739	3,845	1,102
5.) NPV