Amazon Studios -

Tax rate is 30% and cost of capital is 8%.

Payback, Net present value, Cash Flow spreadsheet, internal rate of return and Modified Internal Rate of Return methods Amazon.com Inc., led by Chairman and CEO Jeff Bezos and his management team are looking to expand their business model in the United States. They are looking at investing in three different business(s) and capitalizing on the Amazon name to increase revenues and profit. A business propositions present Amazon with a unique opportunity in the marketplace it serves, the capital budget has been limited to $850M due to a concern of shareholder backlash if profits due not materialize quickly. CEO Jeff Bezos has hired you to do the Capital Budgeting analysis on the three investment opportunities below. All projects must exceed Amazons cost of capital. Amazon requires a five-year outlook on their investments. Bezos expects a thorough analysis with a solid recommendation on what Amazon.com Inc. should do. There has been an increasing demand by shareholders to invest in profitable capital projects. Historically, Amazon has not provided investors with large profits, even though their revenue was over $107B in 2015. Bezos has always taken a long-term view on Amazons profitability goals, but with shareholders unhappy, he feels pressured to invest in some profitable business ventures.

2. Amazon Studios Would be developed as an in-house production company to develop television shows, movies and comics to be sold through Amazon streaming or books. Amazon management is excited about investing in a production company to capture the lucrative profits of releasing your own developed material. Our plan is to develop 12 movies a year for theater release, but offer these movies to our Prime members within 30 60 days. It is a win-win, earn revenue/profit at the box office and increase Prime membership due to our TV shows and quick release of major movie titles. This is a new frontier for movie distribution. We will be the first to develop this movie release business model. Management estimates achieving a 35% Gross Profit Margin after subtracting the studios production costs. However, CEO Bezos, cautions that NetFlix and Hula are not going to roll over and surrender the streaming business to us. They may follow suit by making their own movies. In addition, the cost to make a movie is around $70M and the cost to distribute the movie can run $30M. There is risk. He forecasts Year 1 Revenue at $550M. The 2016 Earnings Before Depreciation and Taxes are forecast at 20% of Revenue each year. He projects that in Years 2 5 he can increase his EBDT by 5% a year by reducing production and distribution costs. Equipment purchase price is projected to be $200M to be taken over 15 years MACRS. Jeff Bezos is enthusiastic on Amazon Studios.