Capital expenditures to produce the new stores will initially require an investment of $1.8 billion. Other development costs that will be required to finish the stores project is $900 million this year. Any ongoing costs for upgrades will be covered in the margin calculation below. The store project is expected to have a life of five years. First-year revenues for the new ride are expected to be $3,400,000,000 ($3,400 million). The ride revenues are expected to grow by 37% for the second year, and then increase by 5% for the third, decrease by 15% for the 4th and finally decrease by 25% for the 5th (final) year of operation. Your job is to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs and net working capital requirements are similar to the rest of the companys products. Since your boss hasnt been much help, here are some tips to guide your analysis:

1. You will need to use the Financial Statements that you downloaded in Part 1.
2. You are now ready to determine the free cash flow. Compute the free cash flow based on the information above for each year using :

Free Cash Flow = (Revenues Costs- Depreciation) x(1- Tax Rate) + Depreciation Capex Change in NWC

Set up the timeline and computation of the free cash flow in separate, contiguous columns for each year of the project life. Be sure to make outflows negative and inflows positive.

1. Assume that the projects profitability will be similar to AAPs existing projects and estimate costs for each year of your project by using the average ratio of non-depreciation costs to revenue for the last 2 fiscal years (in practice you really tend to use at least 4 years worth of data, but for this exercise 2 years will suffice):

(Costs of Goods Sold* + SG&A)/Sales

*AAP calls cost of goods sold, cost of sales

You should assume that this ratio will hold for this project as well. You do not need to break out the individual components of operating costs in your forecast.

Simply the forecast to the Total Cost of Goods Sold (or cost of revenue) + SG&A +R&D for each year.

Determine AAPs tax rate as 1- (Income After Tax/Income Before Tax) in the last fiscal year reported. Recalculate the WACC form Part 1 using this tax rate. What should you use if this number is negative?

Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the projects sales. Use AAPs last 2 fiscal year average NWC/Sales to estimate the required percentage. (Use only accounts receivable, accounts payable, and inventory to measure working capital. Other components of current assets and liabilities are harder to interpret and are not necessarily reflective of the projects required NWCe.g., AAPs cash holdings.)

To determine the free cash flow, calculate the additional capital investment and the change in net working capital each year.

Determine the NPV of the project with WACC calculated in Part 1 step 10 and the projects IRR

For the NPV calculation remember to add the first CF when you are using the excel function =NPV(rate, CF1:CF5) + CF0

For the IRR include all cash flows in your excel calculation.

Should AAP invest in the project?

12 Months Ended CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands Dec. 28, 2019 Dec. 29, 2018 Dec. 30, 2017 $ 486,896 $ 423,847 $475,505 238,371 37,438 6,671 12,437 23,148 238,184 27,760 15,956 2,195 15,956 249,260 35,267 17,106 3,123 (151,263) (62,837) (63,130) 245,785 (72,288) 14,418 866,909 (21,471) (206,125) 285,493 93,940 (64,707) 811,028 36,047 167,548 (197,168) (13,295) (21,325) 600,805 (193,715) (189,758) (270,129) (201,519) 8,709 1,888 11,099 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Share-based compensation Loss and impairment of long-lived assets Other, net Provision (benefit) for deferred income taxes Net change in: Receivables, net Inventories Accounts payable Accrued expenses Other assets and liabilities, net Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Purchase of an indefinite-lived intangible asset Proceeds from sales of property and equipment Other, net Net cash used in investing activities Cash flows from financing activities: (Decrease) increase in bank overdrafts Redemption of senior unsecured note Borrowings under credit facilities Payments on credit facilities Dividends paid Proceeds from the issuance of common stock Repurchases of common stock Other, net Net cash used in financing activities Effect of exchange rate changes on cash Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental cash flow information: Interest paid Income tax payments Non-cash transactions: Accrued purchases of property and equipment (462,939) (191,827) (178,639) 32,014 14,004 (59,339) (310,047) 0 0 (17,185) 3,334 (498,435) (481) (882,153) (17,819) 3,200 (281,354) 44 (263,915) (5,696) 349,590 546,937 896,527 534,400 (534,400) (17,854) 4,076 (6,498) (8,600) (14,872) 4,465 411,759 135,178 546,937 321 (477,862) 896,527 418,665 41,099 108,163 45,322 143,213 53,509 192,116 $ 26,201 $ 15,365 $ 14,335 AAP's New Stores Project Amounts in Millions Year 0 1 2 3 Revenues Costs Depreciation Tax Rate Capital Expenditures NWC Chg NWC Recover NWC FCF (millions) Cost of Capital NPV = IRR = (For the IRR include all cash flows in your excel calculation.) Should AAP invest in the project? 12 Months Ended CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands Dec. 28, 2019 Dec. 29, 2018 Dec. 30, 2017 $ 486,896 $ 423,847 $475,505 238,371 37,438 6,671 12,437 23,148 238,184 27,760 15,956 2,195 15,956 249,260 35,267 17,106 3,123 (151,263) (62,837) (63,130) 245,785 (72,288) 14,418 866,909 (21,471) (206,125) 285,493 93,940 (64,707) 811,028 36,047 167,548 (197,168) (13,295) (21,325) 600,805 (193,715) (189,758) (270,129) (201,519) 8,709 1,888 11,099 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Share-based compensation Loss and impairment of long-lived assets Other, net Provision (benefit) for deferred income taxes Net change in: Receivables, net Inventories Accounts payable Accrued expenses Other assets and liabilities, net Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Purchase of an indefinite-lived intangible asset Proceeds from sales of property and equipment Other, net Net cash used in investing activities Cash flows from financing activities: (Decrease) increase in bank overdrafts Redemption of senior unsecured note Borrowings under credit facilities Payments on credit facilities Dividends paid Proceeds from the issuance of common stock Repurchases of common stock Other, net Net cash used in financing activities Effect of exchange rate changes on cash Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental cash flow information: Interest paid Income tax payments Non-cash transactions: Accrued purchases of property and equipment (462,939) (191,827) (178,639) 32,014 14,004 (59,339) (310,047) 0 0 (17,185) 3,334 (498,435) (481) (882,153) (17,819) 3,200 (281,354) 44 (263,915) (5,696) 349,590 546,937 896,527 534,400 (534,400) (17,854) 4,076 (6,498) (8,600) (14,872) 4,465 411,759 135,178 546,937 321 (477,862) 896,527 418,665 41,099 108,163 45,322 143,213 53,509 192,116 $ 26,201 $ 15,365 $ 14,335 AAP's New Stores Project Amounts in Millions Year 0 1 2 3 Revenues Costs Depreciation Tax Rate Capital Expenditures NWC Chg NWC Recover NWC FCF (millions) Cost of Capital NPV = IRR = (For the IRR include all cash flows in your excel calculation.) Should AAP invest in the project