After looking at the projections of the HomeNet? project, you decide that they are not realistic. It is unlikely that sales will be constant over the? four-year life of the project.?
Furthermore, other companies are likely to offer competing? products, so the assumption that the sales price will remain constant is also likely to be optimistic.? Finally, as production ramps? up, you anticipate lower per unit production costs resulting from economies of scale.?
Therefore, you decide to redo the projections under the following? assumptions: Sales of 50,000 units in year 1 increasing by 52,000 units per year over the life of the? project, a year 1 sales price of $260?/unit, decreasing by 11% annually and a year 1 cost of $120?/unit decreasing by 21% annually. In? addition, new tax laws allow you to depreciate the? equipment, costing $7.5 million over three rather than five years using? straight-line depreciation.
a. Keeping the underlying assumptions in Table 1 that research and development expenditures total $15 million in year 0 and? selling, general, and administrative expenses are $2.8 million per? year, recalculate unlevered net income.? (That is, reproduce Table 1 under the new assumptions given above. Note that we are ignoring cannibalization and lost? rent.)
Table 1
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Incremental Earnings Forecast? ($000)
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1
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Sales
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?-
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?26,000
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?26,000
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?26,000
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?26,000
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?-
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2
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Cost of Goods Sold
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?-
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?(11,000)
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?(11,000)
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?(11,000)
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?(11,000)
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?-
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3
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Gross Profits
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?-
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?15,000
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?15,000
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?15,000
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?15,000
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?-
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4
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?Selling, General, and Administrative
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?-
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?(2,800)
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?(2,800)
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?(2,800)
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?(2,800)
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?-
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5
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Research and Development
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?(15,000)
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?-
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?-
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?-
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?-
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?-
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|
6
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Depreciation
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?-
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?(1,500)
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?(1,500)
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?(1,500)
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?(1,500)
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?(1,500)
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7
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EBIT
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?(15,000)
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?10,700
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?10,700
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?10,700
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?10,700
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?(1,500)
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8
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Income Tax at? 40%
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?6,000
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?(4,280)
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?(4,280)
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?(4,280)
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?(4,280)
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600
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9
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Unlevered Net Income
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?(9,000)
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?6,420
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?6,420
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?6,420
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?6,420
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?(900)
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Calculate the yearly unlevered net income? below: ?(Round to the nearest? dollar.)
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Save Accounting Table...
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+
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Copy to Clipboard...
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+
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Year 0
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Incremental Earnings Forecast ($ million)
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Sales of Mini Mochi Munch
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$
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Other Sales
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$
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Cost of Goods Sold
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$
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Gross Profit
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$
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Selling, General, and Administrative
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$
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Depreciation
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$
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EBIT
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$
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Income Tax at 45%
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$
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Incremental Earnings
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$
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b. Recalculate unlevered net income? assuming, in? addition, that each year 20% of sales comes from customers who would have purchased an existing Cisco router for $100?/unit and that this router costs $60?/unit to manufacture.