Insights Into Amazon.com’s Success, UK Government Policies, And Commodity Price Index

Calculation of the Required Rate of Return for Two Projects and Optimal Selection

Amazon.com is an e-commerce company whose headquarter is based in Washington and was founded in July 1994. It is also one of the largest company in the industry of cloud computing. Amazon.com is now recognised as the largest internet retailer in the entire world because of its market capitalisation which is also the highest (Amazon.com 2017). It has employed on an around 341400 employees under it and has generated revenue of around $135.98 billion.

Amazon.com is setting up more and more business models with excellent infrastructure which is contributing to its revenue growth and ultimately to its phenomenal success. The success of the company is also motivating its workforce to promote the company’s international brands. As per the recognised structure-conduct-performance paradigm, the corporate performance of an international organisation primarily depends on the behavioural pattern of demand and supply chain managed by the game players of the respective business (Klaus 2013). Amazon.com operates its business across the world in the electronic commerce market which is developed remarkably in the last few years through the use of advanced technologies. The innovation in the internet and other related technologies has enhanced the use internet globally. As Amazon.com has gained the top position in the e-commerce industry through its excellent functionalities, it is attaining tremendous growth and success for its products and services over the geographical boundaries thereby widening its customer base all over the world.

The infrastructural facilities of Amazon.com have largely contributed to the extraordinary performance of the company and has also provided the competitive edge over its competitors. Also, the distinguishing feature of the company to remain focused on the customer needs adds to its functional capabilities. It analyses the demands and needs of its customers and potential customers from all the corners of the world. Amazon.com has always believed in the team building concept to attain the organisational efficiencies and to smoothen the overall functioning of the company. Therefore, it has strived to maintain an adequate organisational structure for all its geographical divisions in the proper hierarchal order. The favourable conditions in the areas of consumer behaviour and technological trends is promoting the organisational development (Ritala, Golnam and Wegmann, 2014). Amazon has created its goodwill in the market place by always performing as per the expectations of its customers in terms of demands and the quality of products and services provided.

Figure 1: Figure representing Six Dimension of Amazon

Amazon’s Success and its Contributing Factors

(Source: Amazon.com 2017)

The above figure shows that Amazon has achieved a top position by rendering its products and services across the world and by winning the trust of its customers for its own brand.

The figure below incorporated indicates the growth of Amazon’s sales over several years:

Figure 2: Figure representing Revenue of Amazon over the years

(Source: Amazon.com 2017)

A consumer price index of a commodity is defined as the weighted average mean of the relative future or spot prices of the commodities in a particular set. A comparative study chart is prepared to incorporate all the prices of the commodities (Eichhorn and Voeller, 2012). It is determined through the use of chart that is constructed with the statistical estimates of prices of relative commodities whose price data is collected over a period of time, generally a year. It is calculated by a mathematical formula where price of the basket of commodities in a particular year is divided by that of base year. Then the ratio that arrives after the division is multiplied by 100. The final result that comes after performing the mathematical calculation is the commodity’s price index and it is used to determine the inflation rate of the particular period. It indicates the change (in percentage) of price index between the two given periods. The changes in prices of a commodity is generally affected by the change in the demand of that commodity.

The price index of potato is influenced by the change in the demand pattern of the potatoes and their prices. Therefore, the value of potatoes can be said to be dependent on the factors that mentioned above. Though, it is given that with increased competition has led to confined supply of potatoes and even the price index of potatoes between February and March 2017 has been found to be increased by 3.2% which is lower than the rise in price index of February and March 2016, i.e. 9.6%.Yet, the price index of potato depicts that the price of the potato in the month of March 2017 was comparatively higher than that of March 2016 (Azevedo and Leshno, 2016). The rise is the price was mainly due to two reasons: one is the demand of the potatoes and other is the increase in the inflationary rate in this particular industry.

It is evident that due to several economic reasons there has been significant increase in the potato price index but the supply of potato could not be increased in the same proportion. It can said that when the potato supply is not being increased in the same proportion of rise in potato’s price index, the rise in the price index of potato is due to the overall increase in the potato’s price level in the economy. Also, the increased inflation in the economy has also caused the rise in the prices of various products.

Importance of UK Government Policies in Economic Development

Figure 3: Figure representing Elasticity of Demand

(Source: Frank, Bernanke and Lui 2015)

As potato is one amongst the most commonly used edible items its, the demand for this item does not get easily affected. The supply of potatoes will also not affect its demand.  From the above graphical representation it is clear that not just the inelastic demand of a product affects its supply but sometimes price level of a product also influences the supply of products (Frank, Bernanke and Lui, 2015). This facts makes it simple to compare potato’s price index in current year with that of previous year

The economy of United Kingdom is recognised as one of the most developed as well as market oriented economies all over the world as it has successfully faced extreme economic fluctuation many a times. The UK government has formulated several policies to achieve the aim of economic success of the country (Laibson and List, 2015). Those policies are discussed as follows:

To attain economic development of a country it is necessary to either undertake the demand sided policies or the supply sided policies. Each of those policies are being discussed below:

These policies are aimed at increasing or decreasing the aggregate demand to affect the output, employment and inflation. This sort of policy can further be divided into two categories. One is the monetary policy and the other one is the fiscal policy.

These policies involves use of interest rates and the other monetary tools to increase the level of consumer’s spending and the aggregate demand. It will thus ultimately influence per person’s investment and expenditure in a nation. However, the UK government could not succeed to take into account the probability of liquidity situation in improving the overall economy (McCombie and Thirlwall, 2016). In situations like this reduction of interest rate may not be improved with the actual level of spending.

Figure 4: Figure representing Base rate and Real GDP growth in UK

(Source: McCombie and Thirlwall 2016)

The above shown figure indicates that the interest rate in year 2009 in UK economy could no create a good impact on its overall GDP due to the reason that banks did not give enough of consideration to the activities of borrowing as well as investing.

With the failure of UK government to formulate appropriate monetary policies thereby increasing the borrowings of the economy. To deal with this it introduced the fiscal policies to improve the economy. To improve the monetary policy, a country has to reduce the tax burden with government’s initiatives to increase the employment in the economy (Otley, 2016).

Understanding Commodity Price Index

Figure 5: Figure representing borrowing of UK following the implementation of expansionary fiscal policy

(Source: Otley 2016)

It is one of the most important method of improving the overall prosperity of the economy through the means of bring devaluation in the currency of that particular country. The purpose of devaluation was to promote the exports for the country as it will ultimately contribute to the advancement of economy of the country.

To implement the demand sided policies, UK Government has also formulated and implemented the supply sided polies (Taussig, 2013). In the past years labour market of UK faced extreme disturbance due to labour strikes. This was dealt by reducing the powers of trade unions and by formulation of strategies in this context for the economic growth.

Financial statements of an entity are the comprehensive set of all the financial information relating to the business of the entity. It contains necessary information about the transactions and events occurred in any business in a particular period. The managers of the company forms these financial statements as the basis of financial planning by making future financial projection and various types of budgets (Pradhan, Nishigaki and Hall, 2017). Those budgets and plans helps the managers in allocating the resources available with the business to different departments. The financial planning enables the managers to effectively and efficiently utilise the available business resources while carrying out the business in the short run as well as long run. Also, financial statements provides a concrete platform to analyse the profitability, liquidity, solvency and other financial positions of the company through the use of ratio analysis tools (Afonso and Sousa, 2012). This analysis provides support to the business managers in decision making. Moreover, in making various decisions regarding the capital investments to be made or to appraise capital investments alternatives various tools and techniques of capital budgeting are employed such as net present value method, payback period method, internal rate of return etc. These techniques are used to identify whether the investment plan involving the huge capital expenditure is worth undertaking or continuing or not. Managers are responsible to maintain a reasonable structure of debt and equity in the business and therefore a proper capital structure must be built through the deployment of capital budgeting tools and techniques.

Financial intermediation is the process of accepting the deposits from the people who has surplus funds and lending the money deposited to the parties who needs financial assistance. The banking and other financial institutions are generally involved in the mechanism of financial intermediation. They charge interest rate from the borrower of the funds and pay the interest on the deposits to the lenders of the funds at a lower rate than they charge from the borrowers. Financial instruments are the contracts in the form of monetary assets which are generally traded between the parties to the contract (DaSilva and Trkman, 2014). These instruments can easily be created, traded, modified or settled. These financial agreements can either be in the form of cash (currency) or a right to receive or an obligation to deliver cash, or in any other form like derivative instruments.

Financial Statements and their Significance

The risk and returns on a particular asset or investment are generally directly proportional as an investment with higher risk can offer higher returns to the investors and the investments that are less risky, does not normally have the potential of offering higher returns. Even the variability of return determines the risk involved in the investment (Rios, McConnell and Brue, 2013). For example, an investment with 5% of interest rate for next 3 years involves no risk as the interest payment i.e. the return generated by it is same for all the years. But at the same time an investment that will offer fluctuating rates of interest every year will involve higher risk as it may offer higher returns or may not offer the returns up to the investor’s expectations. It may offer 10% return in one year and 3% in another year whereas the investor expects it to generate at least 5% return per year. The variability of return has increased the level of risk in this particular investment.

Therefore, it is necessary to assess the uncertainty or variability of return while considering the other risks attached to the investment (Ghysels, Plazzi and Valkanov).

Ratio analysis of Morrison Supermarket PLC

(All figures in £ millions)

Liquidity Ratio			2015	2014
Quick Ratio=		Quick Assets	480	577
		Current Liabilities	2273	2873

Working notes:

Quick Assets	2015	2014
Cash And Cash Equivalents	241	261
Accounts Receivables	239	316
Total Quick Assets	480	577

Market Value Ratio		2015	2014
Earnings Per Share	Net Earnings	-761	-238
	Weighted Average No. Of Shares	2332.5	2327
		-0.33	-0.10

Asset Management Ratio	2015	2014
Fixed Asset Turnover	16816	17680
	7252	8625
	2.32	2.05

Working Note:

Fixed assets	2015	2014
Cost of Fixed Assets	10675	12350
Less: Accumulated Depreciation	3423	3725
Net Fixed Assets	7252	8625

Debt Management Ratio	2015	2014
Debt Equity Ratio	5577	6037
	3594	4692
	1.55	1.29
Debt =
	2015	2014
Current Liabilities	2273	2873
Non-Current Liabilities	3304	3164
Total Debt	5577	6037

Profitability Ratio		2015	2014
Gross Profit Margin Ratio	Gross Profit	761	1074
	Sales Revenue	16816	17680
		4.53%	6.07%

Ratio analysis of Tesco PLC

(All figures in £ millions)

Liquidity Ratio		2015	2014
Quick Ratio=	Quick Assets	4286	4696
	Current Liabilities	19810	21399
		0.22	0.22

Working notes:

Quick Assets	2015	2014
Cash And Cash Equivalents	2165	2506
Accounts Receivables	2121	2190
Total Quick Assets	4286	4696

Market Value Ratio		2015	2014
Earnings Per Share	Net Earnings	-5741	974
	Weighted Average No. Of Shares	8107	8078
		-0.71	.12

Asset Management Ratio		2015	2014
Fixed Asset Turnover	Net Sales	62284	63557
	Average Fixed Assets	20440	24490
		3.05	2.60

Working Note:

Fixed assets	2015	2014
Cost of Fixed Assets	36791	36585
Less: Accumulated Depreciation	16351	12095
Net Fixed Assets	20440	24490

Debt Management Ratio			2015	2014
Debt Equity Ratio		Debt	37143	35449
		Equity	7071	14715
		5.25	2.41

Profitability Ratio		2015	2014
Gross Profit Margin Ratio	Gross Profit	-2112	4010
	Sales Revenue	62284	63557
		-3.39%	6.31%

The above analysis shows that the current ratio for year 2015 of Tesco PLC i.e. 0.22 is higher than the Morrison Supermarket PLC i.e. 0.21. Therefore, it can be said that the liquidity position of Tesco PLC is better than the Morrison PLC. Though the difference is slight but yet Tesco can be said to be more liquid than Morrison

Tesco PLC is also having higher fixed asset turnover ratio in both the years 2015 and 2014 than the ratio of Morrison PLC in both of those years. Moreover, the ratio is also showing increasing trend in the case of Tesco i.e. 2.60 in year 2014 and 3.05 in year 2015. This shows that Tesco is more capable than Morrison to generate sales from investments in the fixed assets.

The gross profit margin ratio of Tesco is negative 3.39% in the year 2015 whereas the same ratio of Morrison i.e. 4.53% which is quite greater than Tesco. This indicates that Morrison is more profitably operating than Tesco. Thus, the profitability position of Morrison is sound in comparison with Tesco which is operating in loss.

Year end	Opening Balance	Amount Invested	Interest	Closing Balance
1	£                     –	£                400.00	£                 –	£     400.00
2	£           400.00	£                300.00	£          22.00	£     722.00
3	£           722.00	£                250.00	£          39.71	£  1,011.71

YEAR	CASH FLOWS	PVF	PV of CASH FLOWS	CASH FLOWS	PVF	PV of CASH FLOWS
0	-£     50,000.00	1.000	-£ 50,000.00	-£ 50,000.00	1.000	-£ 50,000.00
1	£     25,000.00	0.907	£  22,675.74	£                 –	0.907	£   –
2	£     15,625.00	0.823	£  12,854.73	£                 –	0.823	£   –
3	£        5,000.00	0.746	£  3,731.08	£                 –	0.746	£   –
4	£     12,000.00	0.677	£  8,122.07	£                 –	0.677	£    –
5	£     32,000.00	0.614	£  19,645.22	£  99,500.00	0.614	£  61,084.37
	NPV		£  17,028.84			£  11,084.37

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