Amazon is considering producing a new laptop. This will be a two year project. a
ID: 2657982 • Letter: A
Question
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 5-year MACRS method.
b. The project requires an initial investment in net working capital of $1,000,000 (which will be recaptured at the end of the project).
c. Amazon paid $500,000 last year to conduct a market study to see the demand for an 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 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.
g. The new project will have expenses of $1,500,000 each year of the project's life.
h. There is no interest expense.
i. At the conclusion of the project in two years, the equipment can be sold for $5,000,000.
j. The firm’s marginal tax rate is 25 percent, and the project’s cost of capital is 11 percent.
The following is the MACRS Depreciation Table:
Year
3-year
5-year
7-year
1
33.33%
20.00%
14.29%
2
44.44%
32.00%
24.49%
3
14.82%
19.20%
17.49%
4
7.41%
11.52%
12.49%
5
11.52%
8.93%
6
5.76%
8.93%
7
8.93%
8
4.45%
Question 1
What is the depreciation expense in Year 1 (in $s)?
Question 2
What is the depreciation expense in Year 2 (in $s)?
Question 3
What is the book value of the equipment in year 2?
Question 4
What is the after tax salvage value of the equipment at the end of year 2?
Question 5
What is the terminal cash flow (the last cash flow of the project not including the OCF)?
Question 6
What is the initial investment in this project (enter as a negative number)?
Question 7
What is the after tax OCF in year 1?
Question 8
What is the after tax OCF in year 2?
Question 9
What is the cash flow in year 0 (CF0)?
Question 10
What is the cash flow in year 1 (CF1)?
Question 11
What is the cash flow in year 2 (CF2)?
Question 12
What is the project's NPV?
Question 13
Should you ACCEPT or REJECT the project?
Accept
Reject
Year
3-year
5-year
7-year
1
33.33%
20.00%
14.29%
2
44.44%
32.00%
24.49%
3
14.82%
19.20%
17.49%
4
7.41%
11.52%
12.49%
5
11.52%
8.93%
6
5.76%
8.93%
7
8.93%
8
4.45%
Explanation / Answer
1)depreciation expense in Year 1= 10,000,000*.20
= 2,000,000
2)depreciation expense in Year 2 = cost *Rate for year 2
= 10,000,000 * .32
= $ 3,200,000
3)Total depreciation till year2 = 2,000,000+ 3,200,000 = 5,200,000
Book value =cost- Total depreciation
= 10,000,000 - 5,200,000
= $ 4,800,000
4)Gain on sale =Sale value - book value
= 5,000,000 - 4,800,000
= 200,000
Tax on gain= 200000*.25= 50000
After tax sale value = 5,000,000- 50,000 = 4,950,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.