Question

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%.

6. Using your cost of capital estimates in part 5, recalculate the original NPV and IRR using these new estimates. (Redo part 2, but use the number you estimated instead of 12%). (part 2: 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%.)

7. Write up your findings and determine if Amazon should produce the Echo III. You do not need to submit a spreadsheet for every calculation. Just summarize your results in a table and submit one spreadsheet. Given your analysis, should Amazon proceed with the Echo III?

please show all work/ formulas in excel*****!!!!

Answer 1

Tax	25%
Cost of capital	12%
Year	Initial investment	Net WC	Units	Unit Price	Revenue	Depreciation	Depreciation Amount	EBIT	EBIT(1-t)	After tax salvage value	Net CF	Discount factor	Discounted CF	NPV	IRR
A	B	C	D	E	F	G	H=G*B	I=F-H	J=I*(1-t)	K	L=J+K+H	M=1/(1+r)^n	N=L*M	O=sum(N)	P=IRR( L)
0	-$1,250,000,000	-$600,000,000									-$1,850,000,000	1	-$1,850,000,000	$6,302,619,380	103%
1			10,000,000	$250	$2,500,000,000	14.29%	$178,625,000	$2,321,375,000	$1,741,031,250		$1,919,656,250	0.892857143	$1,713,978,795
2			10,000,000	$250	$2,500,000,000	24.49%	$306,125,000	$2,193,875,000	$1,645,406,250		$1,951,531,250	0.797193878	$1,555,748,764
3			10,000,000	$250	$2,500,000,000	17.49%	$218,625,000	$2,281,375,000	$1,711,031,250		$1,929,656,250	0.711780248	$1,373,491,204
4			10,000,000	$250	$2,500,000,000	12.49%	$156,125,000	$2,343,875,000	$1,757,906,250		$1,914,031,250	0.635518078	$1,216,401,462
5			10,000,000	$250	$2,500,000,000	8.93%	$111,625,000	$2,388,375,000	$1,791,281,250		$1,902,906,250	0.567426856	$1,079,760,110
6		$600,000,000	10,000,000	$250	$2,500,000,000	8.92%	$111,500,000	$2,988,500,000	$2,241,375,000	$41,843,750	$2,394,718,750	0.506631121	$1,213,239,045
	BV at year 6	Initial cost-Accumulated Dep
	BV at year 6	$167,375,000
	After tax salvage value	BV at year 6*tax
	After tax salvage value	$41,843,750
	WACC
	12%	$6,302,619,380.20
	13%	$6,071,454,912.92
	14%	$5,850,583,602.56
	15%	$5,639,421,904.34
	16%	$5,437,425,403.41
	17%	$5,244,085,823.99
	18%	$5,058,928,293.26
	19%	$4,881,508,836.31
	20%	$4,711,412,080.57
	21%	$4,548,249,150.68
	22%	$4,391,655,736.16
	23%	$4,241,290,316.62
	24%	$4,096,832,530.09
	25%	$3,957,981,672.00

Echo III is high return project and should definately be taken up. The NPV is $6.3 billion while IRR is huge 104%