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Category > Management Posted 19 Jan 2018 My Price 10.00

HomeNet project

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
Year 0 1 2 3 4 5
             
HomeNet            
Unit Sales ($000s) 52 50 102 154 206 258
Sales Price ($/unit) 21.80% 260 203.32 159.00 124.34 97.23
Cost of Goods Sold ($/unit) 20% 120 96 96 96 96
Unit Contribution   140 107.32 63.00 28.34 1.23
Fixed Operating Expenses ($000s)            
Research & Development   $     3,000,000.00 $     3,000,000.00 $     3,000,000.00 $     3,000,000.00 $        3,000,000.00
Marketing & Technical Support     $     2,800,000.00 $     2,800,000.00 $     2,800,000.00 $        2,800,000.00
Depreciation of Lab Equipment   $     2,500,000.00 $     2,500,000.00 $     2,500,000.00    
Total Fixed Expenses   $    5,500,000.00 $    8,300,000.00 $    8,300,000.00 $    5,800,000.00 $       5,800,000.00
Break Even Units (Fixed cost/ Contribution per unit)   39286 77339 131754 204693 4715383
Break Even Sales   $ 10,214,285.71 $ 15,724,524.79 $ 20,948,373.93 $ 25,450,567.40 $ 458,476,791.86

Question A is asking for one number and it needs to be a percentage.

Question B is asking for one number

Answers

Maurice Tutor
(5)
Status NEW Posted 19 Jan 2018 09:01 PM My Price 10.00

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