Amazon wants to make and sell its own smartphones. It will cost $220 million initially to build the factory over the course of 12 months, which will be sold for $80 million 10 years after production starts. The factory will be depreciated linearly to $0 over 10 years. Amazon already owns the land on which the factory will be built. The land could currently be sold for $10 million (after taxes) and was purchased for $2 million eight years ago.
After completion of the factory at the end of year 1, Amazon expects earnings before interest and taxes (EBIT) of $39 million each year for 10 years (in years 2 to 11). The company also has to add inventory (components) worth $10 million just before operation starts at the end of the first year.
Amazon's marginal tax rate is 28% and the appropriate cost of capital for this project is 8%.
What is capital investment in year 0, i.e., at the start of the project (in $ million)?
What is the incremental cash flow in year 0 (in $ million)?
What is the incremental cash flow in year 1 (in $ million)?
What is the annual depreciation in year 2 (in $ million)?
