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 10 million Echo IIIs per year at a price of $250 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 would also be required. 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%.
2) If the cost of capital is 12%, compute the NPV and IRR for the project. Test the sensitivity of NPV to changes in the cost of capital by increasing the WACC by 1%.