Question

Suppose Amazon has decided to introduce the Echo III.   Before they launch the Echo III, they...

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%.

5. Use the 10 year Treasury Bond rate as the risk free rate and assume that the market risk premium is 7% to find Amazon’s cost of equity. Assume that Amazon’s bonds are rated AAA and that Amazon’s corporate tax rate is 25%. Find Amazon’s weighted average cost of capital. Assume that the project will be financed with internal funds. You will need to find additional financial information from the Wall Street Journal and online at sites like http://finance.yahoo.com to complete your calculation.

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*****!!!!

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Question 5:

Amazon's WACC calculation

Debt value from balance sheet =24.743 Billion

Equity market value=697.84 Billion

Total =722.583 Billion

Weight of equity = 697.84/722.583 = 0.9657

Weight of debt = 1-0.9657 =0.0343

After tax Cost of debt = 4.25%*(1-0.25) = 3.1875%

Cost of equity = rf + beta*risk premium = 2.85+1.72*7 = 14.84%

WACC = 0.9657*14.84% +0.0343*3.1875% = 14.44%

WACC of Amazon =14.44%

Note: We have answered one full question. Kindly note that one one full question will be answered at a time. Kindly post the other questions seperately for experts to answer.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
8.      You are considering a new product launch. The project will cost $680,000, have a four-year...
8.      You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation.         ...
1. Learning Objectives (a)  Develop proforma Project Income Statement Using Excel Spreadsheet (b)  Compute  Net Project Cash flows, NPV,  IRR...
1. Learning Objectives (a)  Develop proforma Project Income Statement Using Excel Spreadsheet (b)  Compute  Net Project Cash flows, NPV,  IRR and PayBack Period 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $     200,000 2) New equipment cost $          (200,000) 9) Sales increase per year 4% 3) Equipment ship & install cost $            (25,000) 10) Operating cost: $    (120,000) 4) Related start up cost $              (5,000)     (60 Percent of Sales) -60% 5) Inventory increase $             25,000 11) Depreciation (Straight Line)/YR $      (60,000) 6) Accounts Payable...
1. Learning Objectives (a)  Develop proforma Project Income Statement Using Excel Spreadsheet (b)  Compute  Net Project Cash flows, NPV,  IRR...
1. Learning Objectives (a)  Develop proforma Project Income Statement Using Excel Spreadsheet (b)  Compute  Net Project Cash flows, NPV,  IRR and PayBack Period 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $     200,000 2) New equipment cost $          (200,000) 9) Sales increase per year 4% 3) Equipment ship & install cost $            (25,000) 10) Operating cost: $    (120,000) 4) Related start up cost $              (5,000)     (60 Percent of Sales) -60% 5) Inventory increase $             25,000 11) Depreciation (Straight Line)/YR $      (60,000) 6) Accounts Payable...
1. Learning Objectives (a)  Develop proforma Project Income Statement Using Excel Spreadsheet (b)  Compute  Net Project Cash flows, NPV,  IRR...
1. Learning Objectives (a)  Develop proforma Project Income Statement Using Excel Spreadsheet (b)  Compute  Net Project Cash flows, NPV,  IRR and PayBack Period 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $     200,000 2) New equipment cost $          (200,000) 9) Sales increase per year 4% 3) Equipment ship & install cost $            (25,000) 10) Operating cost: $    (120,000) 4) Related start up cost $              (5,000)     (60 Percent of Sales) -60% 5) Inventory increase $             25,000 11) Depreciation (Straight Line)/YR $      (60,000) 6) Accounts Payable...
(a) Develop proforma Project Income Statement Using Excel Spreadsheet (b) Compute Net Project Cash flows, NPV,...
(a) Develop proforma Project Income Statement Using Excel Spreadsheet (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period (c) Develop Problem-Solving and Critical Thinking Skills 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $   200,000 2) New equipment cost $ (200,000) 9) Sales increase per year 5% 3) Equipment ship & install cost $     (35,000) 10) Operating cost: $ (120,000) 4) Related start up cost $       (5,000)     (60 Percent of...
Access Part II of the IG009 Assessment Scenarios document. As the new product development manager, you...
Access Part II of the IG009 Assessment Scenarios document. As the new product development manager, you are considering investment proposals for two mutually exclusive investment opportunities. The two proposals must be evaluated using net present value (NPV), accounting rate of return (ARR), internal rate of return (IRR), and payback. Review the cash flow information in the “Investments” section of the Assessment Scenarios document, and then analyze the investment proposals using Excel or another spreadsheet software to calculate NPV, ARR, IRR,...
Ritter Razors is considering an equipment investment that will cost $910,000. Projected net cash inflows over...
Ritter Razors is considering an equipment investment that will cost $910,000. Projected net cash inflows over the​ equipment's three-year life are as​ follows: Year​ 1: $484,000​; Year​ 2: $382,000​; and Year​ 3: $292,000. Ritter wants to know the​ equipment's IRR. Requirement Use trial and error to find the IRR within a​ 2% range. ​(Hint​: Use RitterRitter​'s hurdle rate of 1212​% to begin the​ trial-and-error process.) Use a business calculator or spreadsheet to compute the exact IRR. Begin by calculating the...
J. Morgan of SparkPlug Inc. has been approached to take over a production facility from B.R....
J. Morgan of SparkPlug Inc. has been approached to take over a production facility from B.R. Machine Company. The acquisition will cost $1,960,000, and the after-tax net cash inflow will be $330,000 per year for 12 years. SparkPlug currently uses 10% for its after-tax cost of capital. Tom Morgan, production manager, is very much in favor of the investment. He argues that the total after-tax net cash inflow is more than the cost of the investment, even if the demand...
Apple is considering whether to build the “Global Store” in Federation Square Melbourne today in 2019....
Apple is considering whether to build the “Global Store” in Federation Square Melbourne today in 2019. Apple has already purchased the land on the site and wants to make a decision about whether to build on it. Assume the store will have a life of 20 years and will generate revenues of $32 million per year AUD over the 20 years (with the first cash flow at the end of year 1). By building the store Apple will attract negative...
Sirius has decided to acquire a new equipment at a cost of $748,000. The equipment has...
Sirius has decided to acquire a new equipment at a cost of $748,000. The equipment has an expected life of 6 years and will be depreciated using 5-year MACRS with rates of .20, .32, .192, .1152, .1152, and .0576 (note that 5-year MACRS depreciation actually takes place over 6 years). There is no actual salvage value. Travis Capital has offered to lease the equipment to Sirius for $153,000 a year for 6 years, with lease payment at the end of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT