Case Study - Homenet-Solved

Let’s consider a hypothetical capital budgeting decision faced by managers of the Linksys division of Cisco Systems, a maker of consumer networking hardware. Linksys is considering the development of a wireless home networking appliance, called HomeNet, that will provide both the hardware and the software necessary to run an entire home from any Internet connection. In addition to connecting PCs and printers, HomeNat will control new Internet-capable stereos, digital video recorders, heating and air-conditioning units, major appliances, telephone and security systems, office equipment, and so on.

HomeNet’s target market is upscale residential “smart” homes and home offices. Based on extensive marketing surveys, the sales forecast for HomeNet is 100 000 units per year. Approximately 25% of HomeNet’s sales come from customers who would have purchased an existing Linksys wireless router if HomeNet were not available. The existing router’s sale price is $100 per unit, and its cost is $60 per unit.

Given the pace of technological change, Linksys expects the new product will have a four-year life. It will be sold through high-end stereo and electronics stores for a retail price of $375, with an expected wholesale price of $260.

Developing the new hardware will be relatively inexpensive, as existing technologies can be simply repackaged in a newly designed, home-friendly box. Industrial design teams will make the box and its packaging aesthetically pleasing to the residential market. Linksys expects total engineering and design costs to amount to $5 million. Once the design is finalized, actual production will be outsourced at a cost (including packaging) of $110 per unit.

In addition to the hardware requirements, Linksys must build a new software application to allow virtual control of the home from the Web. This software development project requires coordination with each of the Web appliance manufacturers and is expected to take a dedicated team of 50...