Question

Suppose that Linksys is considering the development of a wireless home networking appliance, called HomeNet. Based on extensive marketing surveys, the sales forecast for HomeNet is 65,000 units per year. Given the pace of technological change, Linksys expects the product will have a five-year life and an expected wholesale price of $250 (the price Linksys will receive from stores). Actual production will be outsourced at a cost (including packaging) of $135 per unit.

Linksys must also establish a new lab for testing purposes. They will rent the lab space, but will need to purchase $8.2 million of new equipment. The equipment will be depreciated using the straight-line method over a 10-years life. Linksys' marginal tax rate is 35%.

The lab will be operational at the end of one year. At that time, HomeNet will be ready to ship. Linksys expects to spend $3.1 million per year on rental costs for the lab space, as well as rent marketing and support for this product.

HomeNet project has risks similar to its existing projects, for which it has a cost of capital of 10%.

: Suppose the equipment is depreciated using the MACRS method over a 10-years life and thus allows for larger depreciation deductions earlier in the asset’s life as given below:

Year	0	1	2	3	4	5	6	7	8	9	10
%	10	18	14.4	11.52	9.22	7.37	6.55	6.55	6.56	6.55	3.28

Calculate incremental cash flow and NPV.

Answer 1

Based on the given data, pls find below workings and computations:

Assumption:

Since it is mentioend that the Lab shall be ready only at the end of the year and products are shipped only at the end of the year, the revenues and corresponding variable cost of Year 1 are considered in Year 2 along with Year 2 revenue and Costs;