You are evaluating the HomeNet project under the following?assumptions: new tax laws allow?100% bonus depreciation?(all the depreciation?expense, $ 7.5 million, occurs when the asset is put into?use, in this case?immediately). 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

14 %?, calculate:

a. The?break-even annual sales price decline?if: sales of 50,000 units in year 1 increase by 48,000 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 18 % annually. See the data table

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, decreases by 11 % annually and the year 1 cost of $120?/unit decreases by 18 %annually. See the data table

04/11/2019 Data Table Year 0 2 3 5 HomeNet Units Sales (000s) 48 50 98 146 194 Sales Price ($/unit) 11% 260 231.40 205.95 183.30 Cost of Goods Sold ($/unit) 18% 120 98.40 80.69 66.17 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 100% Corporate Tax Rate 20% 20% 20% 20% 209% Year 0 2 3 Incremental Earnings Forecast ($000) 1 Sales 13,000 22,677 30,069 35,560 2 Cost of Goods Sold (6,000 (9.643) (11,781) (12,837) 3 Gross Profits 7,000 13.034 18,288 22,723 4 Selling, General, and Administrative (2,800) (2,800) (2,800) (2,800) 5 Research and Development (15,000) 6 Depreciation (7,500) 7 EBIT (22,500 4.200 10,234 15,488 19,923 8 Income Tax at 20% 4.500 840 (2,047) (3,098) (3,985) 9 Unlevered Net Income (18,000) 3,360 3,187 12,390 15,938 Free Cash Flow ($000) 10 Plus: Depreciation 7,500 11 Less: Capital Expenditures (7.500 12 Less: Increases in NWC (1,050) (906) (787) (665) 13 Free Cash Flow (18,000) 2,310 7,281 11,603 15,273 3.408 Year 0 2 3 5 Net Present Value ($000) 1 Free Cash Flow (18,000) 2,310 7,281 11,603 15,273 3.408 2 Project Cost of Capital 14% 3 Discount Factor 1.000 0.8772 0.7695 0.6750 0.5921 0.5194 4 PV of Free Cash Flow (18,000) 2,026 5,603 7,832 9,043 1,770 5 NPV 8,274