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

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 20 million Echo IIIs per year at a price of $275 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 (NWC) would also be required. Assume that there is a one-time investment in NWC and that this will be recovered at the end of the project.

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.

Pro Formma Income Statcment Tax Rat Starting Sales Seles Growth Rate Price COGS% 25% 20,000,000 0.00% 275.00 62.92% 7.74% 4.46% 1Depreciation 2 Year: 14.29% 24.49% 17.49% 12.49% 00,000,000.005,500000,000.005500,000,000.00 5,500,000,000.00$ 5500,000,000.005500,000,000.00$ 5,500,000,000.005500,000,000.00 3,460,600,000.00 3,460,600,000.00 425,700,000.OD$425,70D,0c0.00425,700,00.C0$425,700,000. 425,700,00.$475,700,0D0.00 425,700,000.045,700,0OD.D0 $185,950,c00.0D1,36,950,0Co.oD1,9,000.00 686,g50,000.c091,150,000.00,00,O00.00$ 91,150,000.0025,300,000.00 827,750,000.00 827,750,000.00 $1,375 ODD,CO0.0D$,35,0D,.D1,375,00D,0o.00135,00,0O.CO1375,000,000.0O1,375,00O,DD0.001,375,D00,ODU.00 1,375,D00,00D.DU 834,350,000.00 Sales Revenue 4 COGS 5 SGA 6 Depreciation 3,460,600,000.00$ 3460,600,000.00$ 3460,600,000.00 3,460,600,000.00 3,460,600,000.00 3,460,600,000.00 Profit 827,750,000.00 827,750,000.00827,750,000.00 827,750,000.00827,750,000.00 827,750,000.00 Nat Profit (1,375,000,000.00) (1,936,000,000.00) 1,551,000,000.00 1,276,000,000.00 1,080,200,000.00 1,079,650,000.00 1,080,200,000.00 1Cash Flow Schedule 2 Initial Cap. Outla 3 Initial NWC 4 Net Income 5 Add Back De 1,250,oD0 -600,000,000 375,000,000.00) S /85,950,000.00 S 589,050,000.00 51,000,000.00 S 961,950,000.00 | $ 589,050,000.00 76,000,000.00 686,950,UUU.00 | S 589,050,000.00 1,080,200,000.00 $ (1,079,650,000.00] -791, 150,UUU.00 | S g0,6UCDU.UU 589,050,000.00 (1,080,200,000.00)$ (834,350,000.00) S $ 1,346,950,000.00 | S 91,150,00U.UU 589,050,000.00 245,3UU,ODD. UU 589,050,000.00 Total 1,850,000,000 589.050,000.00 589,050,000.00

Explanation / Answer

Four Things:
First the forecasts should be done till year 6 and not till year 8
Second add 600000000 (i.e., recovery of Net Working Capital) in year 6
Third taxes is calculated incorrectly-you have calculated as % of sales but it should be as % of operating profit that is the forula should be =C7*$B$5
Fourth net profit formula should be =C7-C8

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