Suppose the HomeNet's Cost of Capital is12%, use NPV, IRR, MIRR, PI, PP and DPPinvestment appraisal methods to analyse thisforecasted FCFs. Interpret your investment decisions madeaccording to the rules mentioned Forecast of FCFS• The Unlevered net income is calculated asEBIT ×(1 - tc ) =(Revenues COGS- Depreciation) x(1 tc)• The project's free cash flow (FCF) in eachperiod is defined asFCF = Unlevered Net Income +Depreciation-CapEx - A Net Working Capital(NWC)Opportunity costs and earningsexternalitiesOpportunity costs to consider.The company's warehouse that houses HomeNet's labcould be otherwise rented out for $200,.000 per yearThe project has negative externalities on other existingsources of revenue.25% of HomeNet's expected sale units are to customerswho would have bought 25% of the old routers (Linksys),assuming HomeNet and Linksys are perfect substitutes.This is to say that the sales of HomeNet cannibalise thesales of Linksys. The old router (Linksys) sells for $100per unit and costs $60 to produce then. The old router(Linksys) was sold 100, 000 units per year.Working CapitalsSuppose HomeNet will have no cash norinventory requirements, but:Customers are expected to pay onaverage within 55 days;• The corporation needs an average of 55days to pay its bills; HomeNet's initial incrementalearnings forecastYear215Incremental Earnings Forecast (S000s)Sales2 Cost of Goods Sold3Gross ProfitSelling. General, and Administrative6 Research and Development6 Depreciation2 EBIT0Income Tax at 40%Unlevered Net Income26,000 26,000 26,000 26,000(11,000) (11,000) (11,000) (11,000)15,000 15,000(2,800) (2,800) (2,800)15,000 15,000(2,800)115,000)(15,000)6,000(9,000)(1,500) (1,500) (1,500) (1,500) (1,500)10,700 10,700(4,280) (4,280)6,42010,700 10,700 (1,500)(4,280) (4,280)6,420600(900)6,4206,4202Depreciation, interest and taxes• The $7.5 million in new equipment is an up-front cashexpense, but it is not directly listed as an expense whencalculating earnings. (a fraction of the cost is deductedeach year as straight line depreciation):Annual Depreciation = $7.5 million / 5 years = $1.5million/yearInterest expense is typically not included in capitalbudgeting: the project should be judged on its own, noton how it will be financed.The marginal corporate tax rate is the rate on themarginal or incremental pound of pre-tax income.3

0 1 2 3 4 5 1 COGS -11000 -11000 -11000 -11000 2 OPENING STOCK 0 0 0 0…

Answered: Interpret your investment decisions…

Business

Finance

Interpret your investment decisions made according to the rules mentioned

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter4: Analysis Of Financial Statements

Section: Chapter Questions

Problem 24P: Income Statement for Year Ended December 31, 2018 (Millions of Dollars) Net sales 795.0 Cost of...

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