The purpose of this final case is to put together the tools of corporate finance that we have covered in this course. You are to construct a spreadsheet to conduct the following analysis. You may want to modify the template I have provided. Once you have conducted your analyses, write up your findings, presenting tables that summarize your results. You do not need to provide a spreadsheet for every calculation you conduct, just provide one Excel spreadsheet (submit the actual spreadsheet with formulas) and summarize the rest of the results in a table and explain the results.
Suppose Amazon has decided to introduce the Echo III. Before they launch the Echo III, they conducted an analysis to see if the Echo II would be a desirable investment. The company estimated that it would sell 10 million Echo IIIs per year at a price of $250 for the next six years.
The initial capital outlay is determined to be $1.25 billion and a $600 million outlay in net working capital would also be required.
Assume that the equipment used will be depreciated using the MACRS 7 year schedule and that the equipment has a salvage value of zero. At the end of year 6, the equipment will be sold for its book value. Also, assume that that the tax rate is 25%.
Using information from Amazon’s financial statements (you may want to use Morningstar.com or some other online site) estimate the operating cash flows from the project. Make any simplifying assumptions that are necessary to produce the estimate.
If the cost of capital is 12%, compute the NPV and IRR for the project. Test the sensitivity of NPV to changes in the cost of capital by increasing the WACC by 1%.