Let's think about project evaluation issues related to starting and staffing a joint-venture with Amazon. For the past few years, Kohls and Amazon have partnered to allow people to return their Amazon orders at a Kohls location.

Let's evaluate this decision by looking at what one store would have to do to create a system to process these returns and the revenues that they would then receive.

I have provided you with project data on the right. Assume that this decision was made in 2021 (Year 0). We will then project out for five years (2022 - 2026). We'll handle any cash flows after 2026 below.

Number of Packages Processed are the forecasted packages that Kohls will process in each year. I have given you an estimate for 2022 and then annual expected growth rates after that.

Amazon Reimbursement per Package payments to Kohls for each package processed. These are forecasted to be $7/package in 2022 and 2023, and $8/package after that.

Costs Associated With Package Project gives staffing and overhead costs per year if the store returns packages for Amazon. I have given you data for 2022. Assume that each grows by 3% per year to fill in the rest of the years.

Start-Up Expenses gives expenses related to returning the packages. These cash flows, if relevant, occur in Year 0, before operations start. Each store would need to pay $7,000 for furnishings to create a separate Amazon section. Each store will also need to pay Amazon $1,000 for signs and logos to put up.

Capital Expenses are cash flows that happen in Year 0, but are not expensed in Year 0. Instead, they should be depreciated using straight-line depreciation over the first three years of the project life. The only relevant ones here are for computer and other IT equipment to process the returns.

Net Working Capital captures the total net working capital needs associated with the project in each year. Each store must spend $500 in Years 1 and 2. $500 of this gets returned in Year 5.

1) Set up a cash flow table for each year (Years 0 - 5). You'll need to find operating income (i.e. the cost savings from the project), other expenses, pre-tax income, taxes, and after-tax income. You'll also need to then to make the other necessary adjustments to get to total cash flows for the project.

At the end of the project, assume a horizon value where you treat the Year 5 cash flow as a growing perpetuity, but with a growth rate of -3%. Yeah, that's really a negative 3%!

2) Find the NPV and IRR of this project.