FINM4000 - Finance - Cash Flow - Working Capital - Assessment Answer

FINM4000 - Finance - Cash Flow - Working Capital - Assessment Answer 

Task:

At Amazon, It’s All About Cash Flow

Part A: Company Financing

• According to Source 2 how did Amazon’s Cash Conversion Cycle in 2014 compare to another retailer that year? What does it say about Amazon’s working capital management?
• .According to Source 2 why is having a negative Cash Conversion Cycle important for a company wanting to experiment with investing in new products that could fail or succeed? 
•  If Amazon couldn’t use cash to fund its new projects, what two financing options would they have available to them (see Source 2)? Discuss what advantages and disadvantages these financing options would have for Amazon. (3 marks)
• .Based on Source 1 (Annual Report) what is Amazon’s Cash Conversion Cycle in 2018? How does this compare with the Cash Conversion Cycle in 2014 (Source 2) and what does it say about Amazon’s supplier relationships? 
•  Based on Pages 6-14 of Amazon’s Annual Report (Source 1) what do you believe are the three most significant risks facing Amazon in 2018? Are these risks systematic or unsystematic? Why? 
• Imagine that in 2007 you purchased an Amazon $1000 face value bond with a fixed annual coupon rate of 4.5% which matures at the end of 2020. Currently, it is the end of 2019 and the bond has a yield to maturity of 5%. What would be the price of the bond today in 2019?
• Consider Source 3. If you bought Amazon shares at the beginning of June 2014 and sold them at the beginning of June 2019, what would be your approximate holding period return? (Assume no dividends.) What does this suggest about the investments that Amazon made from 2014 to 2019? 

Part B: Capital Budgeting

Amazon’s cashier-less Go stores could be a $4 billion business by 2021, new research suggests

Imagine based on the above article Amazon decides to open 3000 US stores (today) in 2019. Assume the spending to roll out the 3000 stores (from the article) would be incurred today. Assume the sales per year (for the 3000 stores) mentioned in the article would occur at the end of each year for 10 years. Due to the absence of cashiers and other staff annual variable costs would only be 10% of revenues in the first five years, and 5% of revenues in the final 5 years of the project as efficiencies increase. Annual fixed costs will be $1.5 billion per year for 10 years. In addition to the initial investment mentioned in the article, Amazon will need to secure the hardware and software capital to run the stores, which will cost an additional $7 billion today. All capital invested in the stores will be depreciated on a straight-line basis over 10 years to 0 and can be sold at the end of year 10 for $1 billion. Due to Amazon’s cash management policies, they want to recover their initial investment within 2 years. Assume all cash flows occur at the end of the year and all values are in USD. Assume the tax rate is 30% over the 10 years.

Based on the above information and sources what are the free cash flows generated by Amazon’s 3000 new stores over the 10 year period (refer to your excel spreadsheet)? 

Calculate the NPV for the new AmazonGo Stores assuming the cost of capital is 12% and 5%. Which discount rate should Amazon use given that this is a speculative venture? 
3. What is the discounted payback period for the project and how does it compare to what the company is hoping for? Do you believe their target is realistic?
4. What are the weaknesses about how cash flows are estimated in the article? Can we rely on them in our analysis? 
5. Based on your analysis in parts 1-4 would you recommend Amazon undertake the project? Why or why not?

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