Part B: Capital Budgeting 

Read the article below and answer the following questions:

Source 4: Amazon Go

Amazon’s cashierless Go stores could be a $4 billion business by

2021, new research suggests

The futuristic shops bring in more revenue than regular convenience stores.

Rani MollaJan 4, 2019, 10:33am EST

Amazon Go is not only trying to out-convenience convenience stores, it could out-earn them, too. And that could mean a new, giant multi-billion dollar business for Amazon within just a few years. Amazon’s new cashless, cashierless stores — which allow customers to just grab items off shelves and automatically get charged upon exiting, thanks to a bevy of sensors and cameras — bring in about 50 percent more revenue on average than typical convenience stores, according to new estimates from RBC Capital Markets analysts.

 Using their own purchases at Go stores as data points, RBC analysts estimated that the typical order size at the new futuristic shops is around $10. The analysts also counted the number of visitors to an Amazon Go — an average of 550 a day — which would mean the average Go store generates an estimated $1.5 million in revenue a year excluding days when current Amazon Go stores are closed.

 Amazon has considered a plan to open as many as 3,000 Amazon Go stores by 2021, according to a Bloomberg report, meaning the futuristic shops could generate in the ballpark of $4.5 billion in sales a year if the company follows that aggressive store rollout plan and if new-store sales are similar to current RBC estimates.

 While Amazon Go has the potential to become a multi-billion-dollar business, it will be expensive to get there. Amazon Go stores need more initial investment than normal convenience stores, with the first Go location requiring more than $1 million in hardware alone. Amazon would need to spend as much as $3 billion to roll out 3,000 stores, Morgan Stanley has estimated. Source: https://www.vox.com/2019/1/4/18166934/amazon-go-stores-revenue-estimates-cashierless

Answer the following questions with the aid of excel spreadsheets. **You also need to answer the below questions in your word file and refer to your excel spreadsheets as supporting documents. Upload your ONE excel spreadsheet separately under “Excel File for Report”. Consider Sources 1-4 above. (All figures are in USD).

Imagine based on the above article Amazon decides to open 3000 US stores (today) in 2019. Assume the spending to roll out the 3000 stores (from the article) would be incurred today. Assume the sales per year (for the 3000 stores) mentioned in the article would occur at the end of each year for 10 years. Due to the absence of cashiers and other staff annual variable costs would only be 10% of revenues in the first five years, and 5% of revenues in the final 5 years of the project as efficiencies increase. Annual fixed costs will be $1.5 billion per year for 10 years. In addition to the initial investment mentioned in the article, Amazon will need to secure the hardware and software capital to run the stores, which will cost an additional $7 billion today. All capital invested in the stores will be depreciated on a straight-line basis over 10 years to 0 and can be sold at the end of year 10 for $1 billion. Due to Amazon’s cash management policies, they want to recover their initial investment within 2 years. Assume all cash flows occur at the end of the year and all values are in USD. Assume the tax rate is 30% over the 10 years.

1. Based on the above information and sources what are the free cash flows generated by Amazon’s 3000 new stores over the 10 year period (refer to your excel spreadsheet)? 

2. Calculate the NPV for the new AmazonGo Stores assuming the cost of capital is 12% and 5%. Which discount rate should Amazon use given that this is a speculative venture? 

3. What is the discounted payback period for the project and how does it compare to what the company is hoping for? (Use a discount rate of 12%.) Do you believe their target is realistic? 

4. What are the weaknesses about how cash flows are estimated in the article? Can we rely on them in our analysis? 

5. Based on your analysis in parts 1-4 would you recommend Amazon undertake the project? Why or why not?