Question
Question 1 (0.5 points) Question 10(0.5 points) Amazon is considering producing a new laptop. This will be a two year project a. New equipment will cost $10,000,000 and depreciation is by the 3-year MACRS method. b. The project requires an initial investment in net working capitall of $1,000,000 (which will be What is the depreciation expense in Year 1 (in $s)? What is the cash flow in year 1 (CF1)? Question 2 (0.5 points) Question 11 (0.5 points Question 12 (1 point) What is the book value of the equipment in year 2? Question 13 (0.5 points) recaptured at the end of the project). c. Amazon pald $500,000 last year to conduct a market study to see the demand for an What is the cash flow in year 2 (CF2)? What is the depreciation expense in Year 2 (in $s)? Amazon laptop, d. The new laptop will directly generate $6,000,000 in revenues each year of the project's life. e. In addition to the revenues in d., the new laptop will also increase existing Amazon App Question 3 (1 point) What is the project's NPV? Store revenues by $500,000 each year of the project's life. f. In addition to the revenues in d., the new laptop will also decrease existing Kindle revenues by $1,000,000 each year of the project's life. B. The new project will have expenses of $1,000,000 each year of the project's life. h. There is no interest expense. Question 4 (1 point) Should you ACCEPT or REJECT the project? What is the after tax salvage value of the equipment at the end of year 2? L. At the conclusion of the project in two years, the equipment can be sold for $2.500,000 Question 5 (1 point) j The firm's marginal tax rate is 25 percent, and the project's cost of capital is 7 percent The following is the MACRS Depreciation Table: Year What is the terminal cash flow (the last cash flow of the project not including the OCF)? Question 6 (1 point) 3-year What is the initial investment in this project (enter as a negative number)? 33.33% 14.29% Question 7 (1 point) 24.49% 17.49% 12.49% 8.93% 8.93% 8.93% What is the after tax OCF in year 1? Question 8 (1 point) 14.82% 19.20% 11.52% 11.52% 5.76% 7.41% What is the after tax OCF in year 2? Question 9 (0.5 points) What is the cash flow in year O (CFO)? 4.45%
Explanation / Answer
Initial Investment Cost of New Equipment 1,00,00,000 Working Capital 10,00,000 Total Initial Investment 1,10,00,000 Revenue 60,00,000 Add: Incr. in sales of others 5,00,000 Less: Decrease in slae of Kindle (10,00,000) Total Additional Revenue 55,00,000 Less: Annual Expenses 10,00,000 Annual Income Before Depn 45,00,000 Residual Value Salvage Value 25,00,000 working Capital 10,00,000 35,00,000 Less: Tax on Gain 69,250 Terminal Cash Flow 34,30,750 Capital Gain Residual Value of Project 25,00,000 Less: Book value 22,23,000 Capital Gain 2,77,000 Tax at 25% 69,250 Calculation of Depreciation year Rate Depn Balance 1,00,00,000 1 33.33% 33,33,000 66,67,000 2 44.44% 44,44,000 22,23,000 NPV Statement 7% Year Capital Inflow/(Outflow) Income Before Depn Depn Taxable Income Tax at 25% OCF FCF Disc Factor PV 0 (1,10,00,000) (1,10,00,000) (1,10,00,000) 1 45,00,000 33,33,000 11,67,000 2,91,750 42,08,250 42,08,250 0.934579 39,32,944 2 34,30,750 45,00,000 44,44,000 56,000 14,000 44,86,000 79,16,750 0.873439 69,14,796 NPV (1,52,260) Depn Exp year 1 33,33,000 Depn Exp year 2 44,44,000 Book value at the end of year 2 22,23,000 After Tax Salvage 24,30,750 Terminal Cash Flow 34,30,750 Initial Investment 1,10,00,000 OCF Year 1 42,08,250 OCF Year 2 44,86,000 Cash flow year 0 (1,10,00,000) Cash Flow in year 1 42,08,250 Cash Flow in year 2 79,16,750 Project NPV (1,52,260) Project should reject as NPV