Lets return to the case involving Amazons project for the Cheetah router. Earlier in the semester, we estimated the cash flows, which is the first step in analyzing project. We now need to estimate Amazons cost of capital in order to continue our analysis of the project.

Use the 10-year Treasury Bond rate as the risk free rate and assume that the market risk premium is 6.5% to find Amazons cost of equity. Assume that Amazons bonds are rated AAA and that Amazons corporate tax rate is 21%. Assume that Amazons bonds have no floatation costs, but the flotation cost of equity is 3.5%. Find Amazons weighted average cost of capital. Assume that the project will be financed with internal funds. You will need to find additional financial information from the Wall Street Journal and online at sites like http://finance.yahoo.com to complete your calculation.

Do this analysis in the same spreadsheet where you computed the operating cash flows for the project. Put the work in a separate tab.

Once you have completed the cost of capital calculations, return to the proforma income statement determine if the project is desirable or not.