This question number is CBsample. ENTER "CBsample" INTO CELL C2 OF THE CAPITAL BUDGETING WORKSHEET, after you have downloaded it. 

Part A (6 marks)

Amazon Australia is also currently considering investing in a new warehouse project which costs $500 million now. This is expected to start earning $80 million in the first year of the project, growing by 5% per annum. Variable costs are 25% of the annual revenue. Annual, fixed costs are $ 5 million per annum, starting at the same time as the variable costs. The warehouse project lasts for 10 years, after which it is sold for 3 times the final year's revenue. In the fifth year of the project, a one-off maintenance cost is required for 5% of the fifth year's revenue. 

Amazon Australia is financed 70% through debt which has a cost of 8% and shareholders expect a 12% return on their equity. Calculate the discount rate, NPV and IRR of this project.

Part B (6 marks)

Amazon Australia is also considering investing in a new fleet of 1,000 delivery drones, each costing $10,000 today. The drones are expected to save 20% of the variable operating cost each year per part A. The use of delivery drones leads to workers being made redundant now, costing the company two and a half times the first year's variable operating costs.  Calculate the discount rate, NPV and IRR of this project, using the project cash flows specified in this part only. Do not combine the cash flows from part A. Note: This is an independent project from part A.

Part C (4 marks)

As Amazon revised their cashflow estimation in part A, the warehouse project is now sold for three and a half time the final year's revenue. If Amazon increased debt financing to 80% and the return on equity increased to 16%, holding all else equal, re-calculate project NPV and IRR. There are no other changes to the capital budgeting estimates of the project. (Part B is unaffected by any changes here.). Holding all else equal, re-calculate project NPV and IRR.

Part D (4 marks)

What is the most appropriate recommendation regarding the projects before and after the cash flow updates?