You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year 1 increasing by 48,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 9% annually and a year 1 cost of $120/unit decreasing by 18% annually. In addition, new tax laws allow you to 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). Under these assumptions the unlevered net income is shown in the table: .. . Suppose that 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.

a. Calculate HomeNet's net working capital requirements (that is, reproduce Table 8.4 LOADING... under the assumptions given).

b. Calculate HomeNet's FCF (that is, reproduce Table 8.3 under the same assumptions).

8.4
Calculation of HomeNets Free Cash Flow (Including Cannibalization and Lost Rent)
		Year	0	1
Incremental Earnings Forcast ($000)
1	Sales		-	23000
2	Cost of Goods Sold		-	(9,500)
3	Gross Profits		-	14000
4	Selling, General, and Administrative		-	(3,000)
5	Research and Development		(15,000)	-
6	Depreciation		-	(1,500)
7	EBIT		(15,000)	9500
8	Income Tax at 40%		6000	(3,800)
9	Unlevered Net Income		(9,000)	5700
Free Cash Flow (000s)
10	Plus: Depreciation		-	1500
11	Less: Capital Expenditures		(7,500)	-
12	Less: Increases in NWC		-	(2,100)
13	Free Cash Flow		(16,500)	5100
8.3
HomeNets Net Working Capital Requirements
		Year	0	1	2
Net Working Capital Forecast ($000)
1	Cash Requirements		-	-	-
2	Inventory		-	-	-
3	Receivables (15% of sales)		-	3525	3525
4	Payable (15% of COGS)		-	-1425	-1425
5	Net Working Capital		-	2100	2100