Guillermo Capital Budgeting
Guillermo is faced with a difficult operating environment. Competition has intensified, and this is driving down his margins. At the same time, labor costs are rising. This is putting a squeeze on Guillermo. At present, it does not look like he can compete head to head against his new rival, as that rival is using a technological competitive advantage to outcompete Guillermo. As a result, Guillermo is now faced with three different options for revitalizing his business. The first is to become a broker for a high-tech competitor based in Norway, a move that would take him out of the manufacturing business. The second is that he could add value to his existing product perhaps allowing him to improve his margins. Guillermo's third option is to adopt the Norwegian company's technology, as this would lower his cost of production significantly, restoring some of his net margin.
In order to evaluate these three disparate alternatives, there are two major considerations. The first is strategic -- which of these strategies offers the best potential for long-term growth. The second is financial. Making financial decisions such as this is termed capital budgeting -- specifically referring to decisions about where to invest the company's capital. There are three main capital budgeting techniques: net present value (NPV), internal rate of return (IRR) and payback period. This paper will analyze the merits of each of these three and then make recommendations to Guillermo.
The first method is the payback period. This method simply refers to the time it takes the company to earn back its initial investment in the project (Accounting for Management, 2011). This method is simple, but it is highly flawed....
Capital Budgeting for Guillermo Furniture Guillermo Navallez, owner of the relatively small yet highly successful furniture manufacturer Guillermo Furniture, is faced with a tough decision. Due to changes in the industry an in his operating atmosphere, Guillermo is unable to continue competitively running his company as he has for the past decades, with a crew of skilled laborers building furniture and with distribution handled essentially by the company itself. He must
Guillermo Risk Capital Budgeting for Guillermo Furniture Guillermo Furniture has an uncertain road ahead, with several options that its owner can select from in an attempt to bring his company into the twenty-first century as a profitable and productive entity. Industry changes and changes in the regional economy have made it impossible for Guillermo to continue running his high-end hand-made furniture with the same laborious and highly skilled process while remaining competitive
Guillermo Furniture Store is facing a difficult operating environment. The cost of labor -- a key input -- is increasing rapidly. The company is facing intense competition from a foreign competitor that has the ability to undercut Guillermo's low-end lines with better-quality goods. In order to save his business, Guillermo has sought out three different alternatives and is subjecting these alternatives to financial analysis. The results of the financial analysis
That option, to invest in high-tech automation equipment, provides the company with the strong growth it needs to boost its financial standing in the next five years. The company has the opportunity now to pay down its debt, or to use the revenues garnered from the investment in the high tech equipment to further expand. Guillermo, by choosing the high tech option, is setting his company up for success. The
The basic premise of IRR is that if the IRR is higher than the discount rate, the project will be profitable over its life, whereas if the IRR is lower, the project will not be profitable. The IRR calculation is normally done in Excel, but can be rendered as The IRR for the patent coating option is 6.9%; for the automation technology it is 64.7%; for the brokerage option it
By focusing measurement on cycle time, productivity, quality and profitability, Guillermo will have better information that can help guide his decision-making with respect to the different strategic choices with which he is faced. If he chooses to continue making furniture, he will be better equipped to improve his processes in the future as this information forms the basis of a much stronger control system than is currently utilized at Guillermo. Break-Even
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