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Financial Forecast Analysis

The document summarizes the recalculation of projections for the HomeNet project under different assumptions. It presents two tables showing recalculated unlevered net income forecasts that account for: 1) Cannibalization of 20% of sales each year from existing products and lower production costs; and 2) Increased sales volumes each year, a lower starting sale price decreasing 10% annually, and accounting for lost sales and profits. The recalculations are done to make the projections more realistic based on competitive factors and expected economies of scale.

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Enrique M.
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179 views6 pages

Financial Forecast Analysis

The document summarizes the recalculation of projections for the HomeNet project under different assumptions. It presents two tables showing recalculated unlevered net income forecasts that account for: 1) Cannibalization of 20% of sales each year from existing products and lower production costs; and 2) Increased sales volumes each year, a lower starting sale price decreasing 10% annually, and accounting for lost sales and profits. The recalculations are done to make the projections more realistic based on competitive factors and expected economies of scale.

Uploaded by

Enrique M.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Problem 7-5

After looking at the projections of the HomeNet project, you decide that they are not realis
are likely to offer competing products, so the assumption that the sales price will remain co
costs resulting from economies of scale. Therefore,you decide to redo the projections unde
the project, a year 1 sales price of $260/unit, decreasing by 10% annually and a year 1 cost
three rather than five years using straightline depreciation.

a. Keeping the other assumptions that underlie Table 7.1 the same, recalculate unlevered n
cannibalization and lost rent.

HomeNet's Incremental Earnings Forecast

Year 0 1
Units Sold (in 000s) 16
Sale Price $ 260
Production cost $ 120
Incremental Earnings Forecast ($000s)
1 Sales $ - $ 4,160
2 Cost of Goods Sold $ - $ (1,920)
3 Gross Profit $ - $ 2,240
4 Selling, General, and $ - $ (2,800)
Administrative
5 Research and Development $ (15,000) $ -
6 Depreciation $ - $ (2,500)
7 EBIT $ (15,000) $ (3,060)
8 Income Tax at 40% $ (6,000) $ (1,224)
9 Unlevered Net Income $ (9,000) $ (1,836)

b. Recalculate unlevered net income assuming, in addition, that each year 20% of sales com
costs $60/unit to manufacture.

HomeNet's Incremental Earnings Forecast


Year 0 1
Units Sold (in 000s) 50
Sale Price $ 145.00
Production cost $ 120.00
Lost Sales 10
Profit on units not $ 400
sold

Incremental Earnings Forecast ($000s)


1 Sales $ - $ 7,250
2 Cost of Goods Sold $ - $ (6,000)
Cost of Lost Sales $ (400)
3 Gross Profit $ - $ 850
4 Selling, General, and $ - $ (2,800)
Administrative
5 Research and Development $ (15,000) $ -
6 Depreciation $ - $ (2,500)
7 EBIT $ (15,000) $ (4,450)
8 Income Tax at 40% $ (6,000) $ (1,780)
9 Unlevered Net Income $ (9,000) $ (2,670)
hat they are not realistic. It is unlikely that sales will be constant over the four-year life of the project. Further
es price will remain constant is also likely to be optimistic. Finally, as production ramps up, you anticipate low
o the projections under the following assumptions: Sales of 50,000 units in year 1 increasing by 50,000 units p
ually and a year 1 cost of $120/unit decreasing by 20% annually. In addition, new tax laws allow you to deprec

ecalculate unlevered net income (that is, reproduce Table 7.1 under the new assumptions, and note that we are

2 3 4 5
189 45 123
$ 234 $ 211 $ 190
$ 96 $ 77 $ 61

$ 44,226 $ 9,477 $ 23,313 $ -


$ (18,144) $ (3,456) $ (7,557) $ -
$ 26,082 $ 6,021 $ 15,756 $ -
$ (2,800) $ (2,800) $ (2,800) $ -

$ - $ - $ - $ -
$ (2,500) $ (2,500) $ - $ -
$ 20,782 $ 721 $ 12,956 $ -
$ 8,313 $ 288 $ 5,183 $ -
$ 12,469 $ 433 $ 7,774 $ -

year 20% of sales comes from customers who would have purchased an existing Linksys router for $100/unit
2 3 4 5
100 150 200
$ 145.00 $ 2,123.00 $ 1,298.00
$ 96.00 $ 76.80
20 30 40
$ 800 $ 1,200 $ 1,600

$ 14,500 $ 318,450 $ 259,600 $ -


$ (9,600) $ (11,520) $ - $ -
$ (800) $ (1,200) $ (1,600)
$ 4,100 $ 305,730 $ 258,000 $ -
$ (2,800) $ (2,800) $ (2,800) $ -

$ - $ - $ - $ -
$ (2,500) $ (2,500) $ - $ -
$ (1,200) $ 300,430 $ 255,200 $ -
$ (480) $ 120,172 $ 102,080 $ -
$ (720) $ 180,258 $ 153,120 $ -
of the project. Furthermore, other companies
s up, you anticipate lower per unit production
asing by 50,000 units per year over the life of
ws allow you to depreciate the equipment over

ns, and note that we are ignoring

sys router for $100/unit and that this router

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