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 $ 15million 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 50,000 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 25 % annually.
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 10 % annually and the year 1 cost of $ 120/unit decreases by 25 % annually.