Reference no: EM133326223

Case: Amazon is looking at a new investment as part of their retail business.  They have named this new venture? "Alexander".  The Alexander project will run for 4? years, after which the project will end.  You are evaluating the Alexander project under the following assumptions? (as shown in this table? here: sales of

	Year	0	1	2	3	4	5
HomeNet
Units Sales (000s)	53		50	103	156	209	-
Sales Price ($/unit)	9%		260	236.6	215.31	195.93
Cost of Goods Sold ($/unit)	20%		120	96	76.8	61.44	-
Operating Expenses ($000s)							-
Hardware & Software Develop.		-15,000					-
Marketing & Technical Support			-2,800	-2,800	-2,800	-2,800	-
Capital Expenditures							-
Lab Equipment		-7,500					-
Depreciation (%)		100	-	-	-	-	-
Marginal Corporate Tax Rate (%)		20	20	20	20	20	-
Year	0	1	2	3	4	5
Incremental Earnings Forecast ($000s)
1	Sales		-	13,000	24,370	33,588	40,949	-
2	Cost of Goods Sold		-	-6,000	-9,888	-11,981	-12,841	-
3	Gross Profits		-	7,000	14,482	21,607	28,108	-
4	Selling, General, and Administrative		-	-2,800	-2,800	-2,800	-2,800	-
5	Research and Development		-15,000	-	-	-	-	-
6	Depreciation		-7,500	-	-	-	-	-
7	EBIT		-22,500	4,200	11,682	18,807	25,308	-
8	Income Tax at 40%		4,500	-840	-2,336	-3,761	-5,062	-
9	Unlevered Net Income		-18,000	3,360	9,346	15,046	20,246	-

 50,000 units in year 1 increasing by

53,000 units per year over the life of the? project, a year 1 sales price of $260?/unit, decreasing by

9% annually and a year 1 cost of $120?/unit decreasing by 20% annually. Amazon assumes that Alexander will not cannabalize any existing Amazon sales.  In? addition, Amazon will take advantage of new tax laws that allow? 100% bonus depreciation on their Alexander investment? (all the depreciation expense occurs when the asset is put into? use, in this case? immediately). In? addition, Amazon will have an initial? "Hardware and Software? development" expenditure of $15 million in year 0 and? "Marketing and Technical? support" expenses of $2.8 million per year that the Alexander project is underway? (starting in year? 1).  

Because Amazon will ship all? "Alexander" sales directly from manufacturers? and/or 3rd-party? sellers, the Alexander project will not require any additional cash or inventory investments from Amazon. ? However, the Alexander project will result in additional accounts receivable? (totaling 15% of that? year's Alexander? sales) and accounts payable? (totaling 15% of that? year's Alexander cost of goods? sold.)

Question 1: Calculate? Alexander's net working capital requirements for each year of the project.

Question 2: Calculate? Alexander's FCF for each year of the project.