Intro Amazon wants to make and sell its own smartphones.

Intro Amazon wants to make and sell its own smartphones. It will cost $110 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 is currently worth $10 million 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 $35 million each year for 10 years (in years 2 to 11). The company also has to add inventory (components) worth $7 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 5%.

1. What is net capital spending in year 0, i.e. at the start of the project (in million)?
2. What is the cash flow from assets in year 0 (in million)?
3. What is the cash flow from assets in year 1 (in million)?
4. What is the cash flow from assets in year 2 (in million)?
5. What is the after-tax salvage value of the factory in year 11?
6. What is the cash flow from assets in year 11 (in million)?
7. What is NPV of the project?