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Year	0	1	2	3	4	5
	HomeNet
	Units Sales (000s)	5555		50	105105	160160	215215	-
	Sales Price ($/unit)	5%		260	247.00247.00	234.65234.65	222.92222.92
	Cost of Goods Sold ($/unit)	20%		120	96.0096.00	76.8076.80	61.4461.44	-
	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%	33.33%	33.33%	-	-
	Marginal Corporate Tax Rate		40%	40%	40%	40%	40%	-

		Year	0	1	2	3	4	5
Incremental Earnings Forecast ($000)
1	Sales		-	13,000	25,935	37,544	47,928	-
2	Cost of Goods Sold		-	(6,000)	(10,080)	(12,288)	(13,210)	-
3	Gross Profits		-	7,000	15,855	25,256	34,718	-
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	10,555	19,956	31,918	-
8	Income Tax at 40%		6,000	(680)	(4,222)	(7,982)	(12,767)	-
9	Unlevered Net Income		(9,000)	1,020	6,333	11,974	19,151	-
Free Cash Flow ($000)
10	Plus: Depreciation			2,500	2,500	2,500
11	Less: Capital Expenditures		(7,500)
12	Less: Increases in NWC			(1,050)	(1,328)	(1,411)	(1,418)
13	Free Cash Flow		(16,500)	2,470	7,505	13,063	17,733	5,207

		Year	0	1	2	3	4	5
Net Present Value ($000)
1	Free Cash Flow		(16,500)	2,470	7,505	13,063	17,733	5,207
2	Project Cost of Capital 1414%
3	Discount Factor		1.000	0.87720.8772	0.76950.7695	0.67500.6750	0.59210.5921	0.51940.5194
4	PV of Free Cash Flow		(16,500)	2,167	5,775	8,818	10,500	2,705
5	NPV		13,464

How do I calculate the break-even annual sales price decline?

What is thee break-even annual unit sales increse?

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 14%, calculate: a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 55,000 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 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 5% annually and the year 1 cost of $120 unit decreases by 20% annually. See a. The break-even annual sales price decline if: sales of 50,000 units in year 1 increase by 55,000 units per year over the lfe of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 20% annually. See 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, decreases by 5% annually and the year 1 cost of $120/unit decreases by 20% annually. See The break-even annual unit sales increase is units. (Round to the nearest integer.)

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