HomeNet’s target market is upscale residential “smart” homes and home offices. Based on extensive marketing surveys, the
Posted: Mon May 02, 2022 9:23 am
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 (scenario 2) :
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.
1)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.
2)Recalculate unlevered net income for the Year
4 assuming, in addition, that each
year 10% of sales comes from customers
who would have purchased an existing Linksys router for
$90/unit (sales price remain constant over
the four years) and that this router
costs $50/unit to
manufacture. (scenario 3).
3)Using the Scenario 2,
Calculate HomeNet’s net working capital requirements for
the year 4 using the following assumptions:
A/R – 20% of Sales
A/P – 15% of COGS
4)Using the Scenario 2, calculate FCF for the year 4
5)Using the Scenario 2, calculate NPV of the project if the cost
of capital is 10%
6)Using the Scenario 2, what is the Sales price that sets NPV to
zero?
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 (scenario 2) :
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.
1)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.
2)Recalculate unlevered net income for the Year
4 assuming, in addition, that each
year 10% of sales comes from customers
who would have purchased an existing Linksys router for
$90/unit (sales price remain constant over
the four years) and that this router
costs $50/unit to
manufacture. (scenario 3).
3)Using the Scenario 2,
Calculate HomeNet’s net working capital requirements for
the year 4 using the following assumptions:
A/R – 20% of Sales
A/P – 15% of COGS
4)Using the Scenario 2, calculate FCF for the year 4
5)Using the Scenario 2, calculate NPV of the project if the cost
of capital is 10%
6)Using the Scenario 2, what is the Sales price that sets NPV to
zero?