FINM4000: Amazon Go Store Analysis - Cash Flow, Risk, and Valuation

This report provides a comprehensive financial analysis of the Amazon Go Store, addressing key aspects such as cash conversion cycles, working capital management, and risk assessment. The analysis compares Amazon's financial metrics with competitors like Walmart and Costco, highlighting its efficient working capital management due to a negative cash conversion cycle. The report also explores the implications of negative cash conversion cycles and various financing options. It further examines systematic and unsystematic risks faced by Amazon, including foreign exchange risk, inventory management risk, and security breaches. The report includes bond valuation and holding period return calculations for Amazon stock, alongside a detailed financial projection for Amazon Go stores, covering income statements, depreciation, free cash flow, net present value, and discounted payback periods, offering insights into the project's financial viability and potential investment decisions.

Running head: AMAZON GO STORE
Amazon Go Store
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Part A:........................................................................................................................................2
Answer to Question 1:............................................................................................................2
Answer to Question 2:............................................................................................................2
Answer to Question 3:............................................................................................................3
Answer to Question 4:............................................................................................................4
Answer to Question 5:............................................................................................................4
Answer to Question 6:............................................................................................................5
Answer to Question 7:............................................................................................................6
Part B:.........................................................................................................................................7
Answer to Question 1:............................................................................................................7
Answer to Question 2:............................................................................................................8
Answer to Question 3:............................................................................................................9
Answer to Question 4:..........................................................................................................10
Answer to Question 5:..........................................................................................................10
Part 3:.......................................................................................................................................11
Answer to Question a:..........................................................................................................11
Answer to Question b:..........................................................................................................11
Answer to Question c:..........................................................................................................11
References:...............................................................................................................................12

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Part A:
Answer to Question 1:
The cash conversion cycle of amazon in comparison to Walmart and Costco is in a
better position. Although both the comparative company have the same timing of cash
coming from consumers, the payment to suppliers gives amazon a comparative advantage as
it takes almost 95.8 days on an average to pay to suppliers. As the cash comes from the
consumer’s lot sooner than the date to pay suppliers. Walmart and Costco have a very short
time period to pay to suppliers and this makes their cash conversion cycle poorer in
comparison to amazon. As both of the comparative company have a timeline to pay to
suppliers at around 30.1 days and 38.5 days for Costco and Walmart respectively.
Amazon has a very efficient working capital management in comparison to its peers
as it has liquid cash reserves for a longer period of time. Thus it does not have the cash
crunch to pay its liabilities which are short term. Thus it indicates an effective management of
working capital and proper policy and procedure to meet the same (Zeidan and Shapir 2017).
Answer to Question 2:
The negative cash conversion cycle has its own significance in comparison to positive
cash conversion cycle. The negative cash conversion cycle means that the consumers are
paying money to the company before the company has to meet its liabilities. Thus this helps
the company to maintain a liquid cash balance which it can use to fund its project or try to
develop new products without the need to borrow from creditors or external sources. This
opens up an opportunity for the company to invest in its research and development activities
and can come up with a new product which might be highly successful or a failure.

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The implication of having a liquid cash reserves saves the company from borrowing
from the market and thus saving on financing cost. Thus the company uses its own money to
innovate and expand without depending on borrowings. This improves the companies rating
along with has a positive impact on the stock price (Garanina and Belova 2015).
Answer to Question 3:
Since as per the question stated the company amazon cannot use its internal cash
flows for funding new projects or invest in new products. This means that one of the possible
means of financing for amazon has been ruled out. The financing option which is ruled out is
the retained earnings. Thus amazon has two other option to finance itself, the first being the
issuance of debt and the second is equity financing.
If the debt issuance takes place it can have several implication on the stock price and
the creation of negative sentiments among the general masses about the future prospects of
amazon. Since amazon has never issued debt and its balance sheet is free from long term
liabilities, it can raise debt at a comparative lower cost from the external sources. As leverage
acts as an amplifier of situations and a little leverage for a company is healthy as it boosts its
growth for expansion. Thus this is the advantage of this financing option available to amazon.
However this creates a negative emotion in the general masses about the fundamentals of the
company. As any company which has not taken debt over the years suddenly takes debt
indicates that cash flows of the company has become uncertain and makes investment in the
company a bit risky. Also the fixed cost of financing has to be borne by the company which
makes a burden on the company to earn profits to meet its debt obligations. Thus this is the
disadvantage of the financing option available to amazon.
The equity financing is an option which is the very last resort a company depends
upon. When the company cannot raise debt at a reasonable cost from the external sources, as

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well as the retained earnings of the company are insufficient to provide the necessary
funding. This option is used to finance the company. The major advantage of equity financing
is that the company does not have to pay a fixed interest and thus it does not create a burden
on the company to earn profits. The disadvantage of this financing is that the company has to
dilute its shareholdings by issuance of new equity shares. This leads to fall in stock price and
substantial dilution of interest of existing shareholders (Nikolova ,Rodionov and Mottaeva
2016).
Answer to Question 4:
Based on source 1 the amazon cash conversion cycle was 28.19 days negative. The
amazon cash conversion cycle in 2014 was 30.445 days negative. It indicates a deteriorating
relationship with the suppliers. This means that the amazon has now poor relationship with
the suppliers (Annual reports, proxies and shareholder letters | Amazon.com, Inc.).
Answer to Question 5:
Systematic and unsystematic risk are faced by all the organisation in the world and it
can has a severe impact on the prospects, operations and financials of the company.
Systematic risk is the risk which is faced by all the company and the occurrence of this risk
affects the entire economy. Unsystematic risk is the risk which is specific to individual
company and does not affect the other company of the economy of the same industry or the
segment.
The three major risk faced by amazon on a global basis are that it has foreign
exchange risk, inventory management risk and loss of data or breach of security risk. Since
amazon is a multinational company and having its operation in almost around the globe. It
has a significant exposure to exchange rate risk as amazon is based in the United States and
the consolidation of their accounts leads to exchange in foreign currency. Since the exchange

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rates are extremely volatile and can fluctuate sometimes in a positive way or a negative way.
Thus this risk is systematic and is faced by all the company which have global operations.
The second risk which is faced by amazon is inventory management risk. This risk is an
unsystematic risk as it faced by amazon only. Since amazon has global operations and each
country might have a specific demand for some particular products. Thus this creates a
diversified base of inventory which has to be sorted and assorted based on popularity, region
to which they are available and the overall cost. If the inventory management of amazon is
not functioning properly it will create miss-management of products and this will affect
operations, sales, revenue and ultimately the profitability of the company. Also there are
various seasons of peak among various countries within amazon, thus the inventory
management team has to stock up popular products in advance to meet the consumer
demands in time of the season. Failure to do so will lead to loss of opportunity for amazon
and maybe loss of customers to other e-commerce websites.
Security breach and a loss of data is a serious threat risk faced by the amazon
company as it has its customers all around the globe. As amazon takes the personal
information of so many consumers around the globe and maintains a database of it. This
contains their name and addresses along with their bank details which they use to purchase
products from the site. The loss of this data is a serious security breach as it can cause
financial losses and is a breach of privacy agreement by amazon. This type of risk is a
unsystematic risk as it can cause serious losses to the company and can make it fall into
various corporate litigation. This will cause a loss of reputation and loss of consumers
because of fear of loss of private information (Park, Song and Lee 2017.)

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Answer to Question 6:
The pricing of a bond is an important tool using the present value of the interest
payments and the face value which will be received at the time of maturity. The maturity
period is an important factor in the calculation along with the discount rate.
Figure 1: valuation of bond
Source: By the Author
Thus by using the above concept we arrive at the present value of the bond at $995.24
in the Year 2019 (Hsu, Lee, Liu and Zhang 2015).
Answer to Question 7:
Holding period return means the return which is generated from a stock from the date
of purchase to the date of sale. This return includes dividend as well as the sale price less the
purchase price.
Figure 2: Holding period Return

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Source: By the Author
The holding period return generated from the amazon stock over a period of 5 years
comes to around 399% which is good return and is excluding dividend (Higgins, 2018)
Part B:
Answer to Question 1:
As given in the question the data is compiled and an income statement is made for the
amazon go store for five years and post five years.
Figure 3: Income Statement
Source: By the Author
The net profit calculated from the project for ten years is about $1155000000 in the
first five years and increases to $1312500000 in the next five years.

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Figure 4: Depreciation
Source: By the Author
The depreciation amount for the 10 years comes to about $900000000 for each year.
Figure 5: Free Cash Flow
Source: By the Author
The free cash flow from the amazon go store expected to be is given above, overall
the project is generating a cash flow of more than 2 billion from the start of the project(Chen,
Sun and Xu 2016).
Answer to Question 2:
The net present value of a project is important to reach a decision whether a project is
viable in the long run. It helps in the decision making process and to reach a conclusion
whether to invest in a project or not, the required rate of return or the discount rate plays an
important role in calculating the present value.

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Figure 6: NPV
Source: By the Author
The Net present value of the project is calculated above at both in 12% and 5%. The
present value reached at 12% is about $ 2.2 billion while it is around $7 billion at 5% rate.
Since this is a speculative task and at both the level of cost of capital it is positive. This task
can be pursued by the amazon company, which means it can invest in this project (Shu,
Zeithammer and Payne 2016).
Answer to Question 3:
The discounted payback period for the company comes to about 1.71 years at the 12%
cost of capital and at 1.55 years at the 5% cost of capital. Thus in both the case the initial
investment is recovered within 2 years. Thus the project is well according to the cash
management policy of the company.

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Figure 7: Discounted payback period
Source: By the Author
The target seems to be realistic as it is shown by the two payback period calculation
above. Also it is better than what the company had expected, as it can recover its initial
investment before the proposed time period.
Answer to Question 4:
The weakness of the cash flow generated in this article is that they are quite optimistic
in the future outlook and expecting huge returns from every store outlet. This cannot be true
as out of some 3000 stores some of them are bound to fail and it has not been taken into
account. The initial investment of just $3 billion is very low for the entire operations as the
concept of this plan has to be started in a slow way and analyse success in some outlets and
thyen expand tyo other territories. The cash flows estimated in this article fail to incorporate
some massive sudden changes which can take place in the company and can have an impact
on the project. These factors might play a massive role in the calculation of present value of
the project and can be factors relating to the success of the project or a failure of the project
(Gorshkov, Vatin, Rymkevich and Kydrevich 2018)
Answer to Question 5:
Well on the above analysis of the project amazon should undertake the project. Since
amazon is a multi-billion company with effective cash management policy and a great

11AMAZON GO STORE
research and development team. The project is a revolution in the field of retail stores and is
going to change and create value in the company if successful. Also at the different cost of
capital the project has shown a positive net present value thus the project can be undertaken
and also the discounted payback period was well under the company cash management
policy. Thus the project should be undertaken (Liu, Lee and Zhang 2018).
Part 3:
Answer to Question a:
The teaching in the class helped me analyse the situation in depth to understand the
annual reports along with the Morningstar reports. Thus this assignment helped to use the
theoretical knowledge in the practical world. Thus, the question concerning in the task
wanted an in depth research and a thorough application of concepts in the answer. Thus the
knowledge gained in the class was helpful in tackling the project
Answer to Question b:
At first we created an income statement from the given data then we calculated
depreciation and post that the free cash flow were calculated. The NPV of the project was
also calculated along with the discounted payback period to judge the return of our
investment.
Answer to Question c:
The preparation for this project was critical and we gave our best effort to give a
proper answer to the question. Thus the effort and dedication which we have given in this
project would be repeated in the next project to acquire the best marks.

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References:
Amazon.com, Inc. - IR. 2019. Annual reports, proxies and shareholder letters | Amazon.com,
Inc. - IR. online Available at: https://ir.aboutamazon.com/annual-reports Accessed 27 Aug.
2019.
Chen, X., Sun, Y. and Xu, X., 2016. Free cash flow, over-investment and corporate
governance in China. Pacific-Basin Finance Journal, 37, pp.81-103.
Garanina, T.A. and Belova, O.A., 2015. Liquidity, cash conversion cycle and financial
performance: case of Russian companies.
Gorshkov, A.S., Vatin, N.I., Rymkevich, P.P. and Kydrevich, O.O., 2018. Payback period of
investments in energy saving. Magazine of Civil Engineering, 78(2).
Higgins, C.J., 2018. Simplicity of the Holding Period Return. Journal of Finance, 6(2),
pp.55-57.
Hsu, P.H., Lee, H.H., Liu, A.Z. and Zhang, Z., 2015. Corporate innovation, default risk, and
bond pricing. Journal of Corporate Finance, 35, pp.329-344.
Liu, Q.M., Lee, C.C. and Zhang, R., 2018, December. Economic Policy Uncertainty and
Firms’ Cash Dividend Policies. In 2018 3rd International Conference on Education, E-
learning and Management Technology (EEMT 2018). Atlantis Press.
Nikolova, L.V., Rodionov, D.G. and Mottaeva, A.B., 2016. Securitization of bank assets as a
source of financing the innovation activity. International Journal of Economics and
Financial Issues, 6(2S), pp.246-252.

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Park, S., Song, S. and Lee, S., 2017. Corporate social responsibility and systematic risk of
restaurant firms: The moderating role of geographical diversification. Tourism
Management, 59, pp.610-620.
Shu, S.B., Zeithammer, R. and Payne, J.W., 2016. Consumer preferences for annuity
attributes: Beyond net present value. Journal of Marketing Research, 53(2), pp.240-262.
Zeidan, R. and Shapir, O.M., 2017. Cash conversion cycle and value-enhancing operations:
Theory and evidence for a free lunch. Journal of Corporate Finance, 45, pp.203-219.