Lets consider a hypothetical capital budgeting decision faced by managers of the Links

development of a wireless home networking appliance, called HomeNet, that will provid
addition to connecting PCs and printers, HomeNet will control new Internet-capable ster
systems, office equipment, and so on. Linksys has already conducted an intensive, $300

We begin by reviewing the revenue and cost estimates for HomeNet. HomeNets targe
the sales forecast for HomeNet is 100,000 units per year. Given the pace of techno
electronics stores for a retail price
Developing the new hardware will be relatively inexpensive, as existing technologies c
box and its packaging aesthetically pleasing to the residential market. Linksys exp
production will be outsourced
In addition to the hardware requirements, Linksys must build a new software applic
coordination with each of the Web appliance manufacturers and is expected to take
(including benefits and related costs) is $200,000 per year. To verify the compatibility o
must also install new equipment th
The software and hardware design will be completed, and the new equipment will be o
$2.8 million per year on

FLUJOS DE CAJA SIN INCREMENTO DE INGRESOS SIN NIVELAR

No. DETALLE 0 1 2
1 Ventas 0 26000000 26000000
2 Costos de los Produccion 0 -11000000 -11000000
3 GROSS PROFIT 0 15000000 15000000
4 Costos Administrativos 0 -2800000 -2800000
5 Investigacin y desarrollo -15000000 0 0
6 Depreciacin 0 -1500000 -1500000
7 EBIT -15000000 10700000 10700000
8 Impuestos 40% 6000000 -4280000 -4280000
9 Ingreso neto sin nivelar -9000000 6420000 6420000
NPV $9,810,642.70
IRR 59.83%
 by managers of the Linksys division of Cisco Systems, a maker of consumer networking hardware. Lin
HomeNet, that will provide both the hardware and the software necessary to run an entire home from
new Internet-capable stereos, digital video recorders, heating and air-conditioning units, major applian
nducted an intensive, $300,000 feasibility study to assess the attractiveness of the new product.

omeNet. HomeNets target market is upscale residential smart homes and home offices. Based on ex
Given the pace of technological change, Linksys expects the product will have a four-year life. It will b
cs stores for a retail price of $375, with an expected wholesale price of $260.
as existing technologies can be simply repackaged in a newly designed, home-friendly box. Industrial
ential market. Linksys expects total engineering and design costs to amount to $5 million. Once the de
uction will be outsourced at a cost (including packaging) of $110 per unit.
build a new software application to allow virtual control of the home from the Web. This software develo
ers and is expected to take a dedicated team of 50 software engineers a full year to complete. The cos
o verify the compatibility of new consumer Internet-ready appliances with the HomeNet system as they
o install new equipment that will require an upfront investment of $7.5 million.
e new equipment will be operational, at the end of one year. At that time, HomeNet will be ready to shi
$2.8 million per year on marketing and support for this product.

NGRESOS SIN NIVELAR

3 4 5
26000000 26000000 0
-11000000 -11000000 0
15000000 15000000 0
-2800000 -2800000 0
0 0 0
-1500000 -1500000 -1500000
10700000 10700000 -1500000
-4280000 -4280000 600000
6420000 6420000 -900000
working hardware. Linksys is considering the
n an entire home from any Internet connection. In
ng units, major appliances, telephone and security
he new product.

me offices. Based on extensive marketing surveys,

four-year life. It will be sold through high-end

iendly box. Industrial design teams will make the

$5 million. Once the design is finalized, actual

b. This software development project requires

r to complete. The cost of a software engineer
meNet system as they become available, Linksys

Net will be ready to ship. Linksys expects to spend

DATOS ADICIONALES
Costos de factibilidad [$] 300000
Unidades al ao (modems) [U/ao] 100000
Precio retail (minorista) [$] 375
Precio mayorista [$] 260
Ingeniera y diseo [$] 5000000
Costos de Produccin [$] 110
Personal de desarrollo [Ingeniero] 50
Costo Personal de desarrollo [$/ao/inegie 200000
Marketing [$] 2800000

Impuestos 40%
Equipo necesario [$] 7500000
Tasa de retorno 10%
 When sales of a new product displace sales of an existing product, the situation is often
purchased an existing Linksys wireless router if HomeNet were not available. If this reductio
calcu

Suppose HomeNets new lab will be housed in warehouse space that the company would ha

FLUJOS DE CAJA SIN INCREMENTO DE INGRESOS SIN NIVELA

No. DETALLE 0 1 2
1 Ventas 0 23500000 23500000
2 Costos de los Produccion 0 -9500000 -9500000
3 GROSS PROFIT 0 14000000 14000000
4 Costos Administrativos 0 -3000000 -3000000
5 Investigacin y desarrollo -15000000 0 0
6 Depreciacin 0 -1500000 -1500000
7 EBIT -15000000 9500000 9500000
8 Impuestos 40% 6000000 -3800000 -3800000
9 Ingreso neto sin nivelar -9000000 5700000 5700000
NPV $7,735,821.68
IRR 50%
 he situation is often referred to as cannibalization. Suppose that approximately 25% of HomeNets sale
ailable. If this reduction in sales of the existing wireless router is a consequence of the decision to deve
calculating HomeNets incremental earnings.

e company would have otherwise rented out for $200,000 per year during years 14. How does this op
earnings?

GRESOS SIN NIVELAR

3 4 5
23500000 23500000 0
-9500000 -9500000 0
14000000 14000000 0
-3000000 -3000000 0
0 0 0
-1500000 -1500000 -1500000
9500000 9500000 -1500000
-3800000 -3800000 600000
5700000 5700000 -900000
25% of HomeNets sales come from customers who would have
of the decision to develop HomeNet, then we must include it when

14. How does this opportunity cost affect HomeNets incremental

Costo de oportunidad [$] 200000

Precio mayorista Canibalizacion 100
Canibalizacion 25%
Costo de produccion Canibalizac 60
Suppose sales of HomeNet were expected to be 100,000 units in year 1, 125,000 units in yea
decline by 10% per year, as with other networking products. By contrast, selling, general, an

FLUJOS DE CAJA SIN INCREMENTO DE INGRESOS SIN NIVEL

No. DETALLE 0 1 2
1 Ventas 0 23500000 26437500
2 Costos de los Produccion 0 -9500000 -10687500
3 GROSS PROFIT 0 14000000 15750000
4 Costos Administrativos 0 -3000000 -3120000
5 Investigacin y desarrollo -15000000 0 0
6 Depreciacin 0 -1500000 -1500000
7 EBIT -15000000 9500000 11130000
8 Impuestos 40% 6000000 -3800000 -4452000
9 Ingreso neto sin nivelar -9000000 5700000 6678000
, 125,000 units in years 2 and 3, and 50,000 units in year 4. Suppose also that HomeNets sale price a
t, selling, general, and administrative expenses are expected to rise with inflation by 4% per year. Upd

NGRESOS SIN NIVELAR

3 4 5
23793750 8565750 0
-9618750 -3462750 0
14175000 5103000 0
-3244800 -3374592 0
0 0 0
-1500000 -1500000 -1500000
9430200 228408 -1500000
-3772080 -91363.2 600000
5658120 137044.8 -900000
 eNets sale price and manufacturing cost are expected to
by 4% per year. Update the incremental earnings forecast

Ao Ventas anualeprecio
0
1 100000
2 125000
3 125000
4 50000
5 0
Reduccion Costos y Precios 10%
Aumento Costos Administrativos 4%
DEPRECIACION Y CAPITAL EXPENDITURE (DEPRENCIACION Y CAPITAL), NET WORKING CAPITA

To compute HomeNets free cash flow, we must add ba

new equipment (a non-cash charge) and subtract the
will be paid for the equi

FREE CASH FLOW

No. DETALLE 0 1 2
1 Ventas 0 23500000 23500000
2 Costos de los Produccion 0 -9500000 -9500000
3 GROSS PROFIT 0 14000000 14000000
4 Costos Administrativos 0 -3000000 -3000000
5 Investigacin y desarrollo -15000000 0 0
6 Depreciacin 0 -1500000 -1500000
7 EBIT -15000000 9500000 9500000
8 Impuestos 40% 6000000 -3800000 -3800000
9 Ingreso neto sin nivelar -9000000 5700000 5700000
10 Depreciacin 0 1500000 1500000
11 CAPITAL EXPENDITURE -7500000 0 0
12 NWC 0 -2100000 0
13 FREE CASH FLOW -16500000 5100000 7200000

* El capital neto de trabajo es la diferencia entre los activos fijos y pasivos

Suppose that HomeNet will have no incremental cash or inventory r

shipped directly from the contract manufacturer to customers). How
HomeNet are expected to account for 15% of annual sales, and payab
the annual cost of goods sold (COGS)
FREE CASH FLOW
No. DETALLE 0 1 2
1 Requerimientos efectivo 0 0 0
 2 Inventario 0 0 0
3 Cuenta por cobrar 0 3525000 3525000
4 Cuenta por pagar 0 -1425000 -1425000
5 NWC 0 2100000 2100000

Depreciation, is called the depreciation tax shield. It is the tax savings that results from t
consequence, deprecia- tion expenses have a positive impact on free cash flow. Firms often
for accounting and for tax purposes. Because only the tax consequences of depreciation are
the depreciation expense that the firm will use for tax purposes in
ET WORKING CAPITAL

must add back to earnings the depreciation expense for the

subtract the actual capital expen- diture of $7.5 million that
for the equipment in year 0.

3 4 5
23500000 23500000 0
-9500000 -9500000 0 *NWC [$] 2100000
14000000 14000000 0 % Por cobrar 15%
-3000000 -3000000 0 % Por pagar 15%
0 0 0
-1500000 -1500000 -1500000
9500000 9500000 -1500000
-3800000 -3800000 600000
5700000 5700000 -900000
1500000 1500000 1500000
0 0 0
0 0 2100000
7200000 7200000 2700000

h or inventory requirements (products will be

customers). However, receivables related to
sales, and payables are expected to be 15% of
ds sold (COGS)
3 4 5
0 0 0
 0 0 0
3525000 3525000 0
-1425000 -1425000 0
2100000 2100000 0

gs that results from the ability to deduct depreciation. As a

ash flow. Firms often report a different depre- ciation expense
s of depreciation are relevant for free cash flow, we should use
se for tax purposes in our forecast.
ense for the
million that
 We compute the NPV of the HomeNet project in the spread
factor, and line 4 multiplies the free cash flow by the discou
project is the sum of the present values of eac

FREE CASH FLOW

No. DETALLE 0 1 2
1 FREE CASH FLOW -16500000 5100000 7200000
2 Costo de capital
3 Factor de Descuento 1 0.89285714 0.79719388
4 PV -16500000 4553571.43 5739795.92
5 NPV 5025967.81
24%
 ect in the spreadsheet in Table 8.5. Line 3 calculates the discount
flow by the discount factor to get the present value. The NPV of the
sent values of each free cash flow, reported on line 5

W
3 4 5
7200000 7200000 2700000

0.71178025 0.63551808 0.56742686

5124817.78 4575730.16 1532052.51
the discount
he NPV of the

Costo de Capital 12%