HomeNet’s target market is upscale residential “smart” homes and home offices. Based on extensive marketing surveys, the

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HomeNet’s target market is upscale residential “smart” homes and
home offices. Based on extensive marketing surveys, the sales
forecast for HomeNet is 100,000 units per year. Given the pace of
technological change, Linksys expects the product will have a
four-year life. It will be sold through high-end electronics stores
for a retail price of $375, with an expected wholesale price of
$260. Developing the new hardware will be relatively inexpensive,
as existing technologies can be simply repackaged in a newly
designed, home-friendly box. Industrial design teams will make the
box and its packaging aesthetically pleasing to the residential
market. Linksys expects total engineering and design costs to
amount to $5 million. Once the design is finalized, actual
production will be outsourced at a cost (including packaging) of
$110 per unit. In addition to the hardware requirements, Linksys
must build a new software application to allow virtual control of
the home from the Web. This software development project requires
coordination with each of the Web appliance manufacturers and is
expected to take a dedicated team of 50 software engineers a full
year to complete. The cost of a software engineer (including
benefits and related costs) is $200,000 per year. To verify the
compatibility of new consumer Internet-ready appliances with the
HomeNet system as they become available, Linksys must also install
new equipment that will require an upfront investment of $7.5
million. The software and hardware design will be completed, and
the new equipment will be operational, at the end of one year. At
that time, HomeNet will be ready to ship. Linksys expects to spend
$2.8 million per year on marketing and support for this
product.
Question 1
You decide to redo the projections under the following
assumptions :
Sales of 50 000 units in year 1, 100 000 units in year 2, 100
000 units in year 3 and 50 000 units in year 4.
Sales price of $260/unit (remain constant); cost per unit -
$115/unit (remain constant)
In addition, new tax laws allow you to depreciate the equipment
over four (4) rather than five years using straightline
depreciation.
Keeping the other assumptions that underlie Table 8.1 the same,
recalculate unlevered net income (that is, reproduce Table 8.1
under the new assumptions, and note that we are ignoring
cannibalization and lost rent) for the Year 4.

Homenet S Target Market Is Upscale Residential Smart Homes And Home Offices Based On Extensive Marketing Surveys The 1 (221.5 KiB) Viewed 17 times

straight-line depreciation, in which the asset's cost (less any expected salvage value) is divided equally over its estimated useful life (we discuss other methods in Section 8.4). If we assume the equipment is purchased at the end of year 0, and then use straight-line depreciation over a five-year life for the new equipment, HomeNet's depreciation expense is $1.5 million per year in years 1 through 5. Deducting Cor Finance TABLE 8.1 SPREADSHEET HomeNet's Incremental Earnings Forecast 1 2 3 5 Year 0 Incremental Earnings Forecast ($000s) 1 Sales 2 Cost of Goods Sold 3 Gross Profit 4 Selling, General, and Administrative 5 Research and Development (15,000) 6 Depreciation 7 EBIT (15,000) 8 Income Tax at 40% 6,000 9 Unlevered Net Income (9,000) 26,000 26,000 26,000 26,000 (11,000) (11,000) (11,000) (11,000) 15,000 15,000 15,000 15,000 (2,800) (2,800) (2,800) (2,800) 0 000 7 (1,500 (1,500) 10,700 10,700 (4,280) (4,280) 6,420 6,420 (1,500) (1,500) (1,500) 10,700 10,700 (1,500) (4,280) (4,280) 600 6,420 6,420 (900) a 'As a result, cash flows that occur at the end of one year will be listed in a different column than those that occur at the start of the next year, even though they may occur only weeks apart. When additional urterly or monthly basis. (See also the Appendix