Reference no: EM132913804

Consider the following case study and answer the questions.

• Amazon Web Services (AWS) is planning to invest in a new datacenter facility outside the US. You are one of the financial analyst that will help assessing the feasibility of the investment.
• AWS has already commissioned one of the Big Four Consulting firm to provide some recommendations with regard to the current legal regulations in China. The consulting service fees paid amount to 2 million dollars.
• Suppose that the life of the project is 10 years and the initial investment in the project today is 100 million dollars.
• The datacenter facility is to be depreciated to a book value of $0 over the 10 years and it is expected that it can be sold for $50 million at the end of the project.
• It has been estimated that the new datacenter facility will be able to generate incremental revenue of $25 million per year for the 10 years (starting at the end of year 1).
• The annual variable cost for the datacenter facility will be 20% of the incremental revenues for every year.
• The corporate tax rate is 30% and AWS has a weighted average cost of capital of 5%.
• AWS is planning to finance this project using a higher proportion of equity than the one used to finance the company as a whole.
• Jeff Bezos (Amazon CEO) wants to recover the initial investment, before the next election in China, in five years' time.

Question 1. You are told in the question that AWS will be financing the project using a higher proportion of equity than the one used to finance the company as a whole. What would happen to the WACC and NPV of the project in the case AWS would be using the appropriate discount rate? What risk is AWS incurring by using the company's WACC as a discount rate?