...Capital Recommendation Paper Alandra Shamblee ACC 543 June 13, 2011 Sean Damico Guillermo Furniture is a furniture manufacture located in Sonora, Mexico. Guillermo Furniture was thriving until the late 1990s, when the economy just took off. With new housing, competitors moved in with more technologically advanced equipment than Guillermo. Guillermo’s furniture created by hand; was one of a kind. The competitors that moved in used computer controlled laser lathe to produce exact cuts in each piece of wood. The competitors could create furniture faster and, much more cost-effective than Guillermo’s method. Guillermo is at a standstill, they need to decide which direction to take their company in. Does Guillermo continue doing business as they have been for many years or do they upgrade their system so they can compete and succeed in the current market. Guillermo has many options they need to consider before making their decision. The reason that so many customers purchased from Guillermo is that their furniture is made by hand. Guillermo needs to think about what affect automating the furniture making will have on their loyal customers who love the handmade designs. Guillermo’s Options The company is considering three different options; continue business as usual with minimal changes, invest in high-tech equipment and begin creating new...
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...Guillermo Furniture Company Guillermo Furniture has just employed you as an accountant. Two significant events affected the company’s financial stability and the owner. Thus, I will distinguish among the different capital budget evaluation techniques and explain how these diverse techniques to assist in providing the best recommendation to the company. I also recommend the present value calculations as part of the recommendation that base on a capital budget evaluation technique. Guillermo Furniture Store has located in a very well-known vacation spot in Sonora, Mexico and an excellent supply of timber. It provides Guillermo Navallez the ability to produce a wide variety of tables and chairs. Guillermo Navallez could price the handcrafted products at a slight premium for the quality because labor was relatively inexpensive. During late 1990’s abroad competitor went into the furniture market of Sonora using a high-tech approach that delivered the furniture to exact clients to determine the low prices. Sonora was also home and headquarters to one of the largest retailers in the nation. During the same period the city began to grow and with an increase in population, development expanded, and jobs raised the costs substantially. These events caused Guillermo to watch his profit margins shrink as the cost rose, and the prices fell. Capital budgeting is a process that managers use when they choose among a strategic investment opportunity (Eldenburg & Wolcott, 2011). It is one...
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...Capital Budget Recommendation for Guillermo Furniture Managerial Accounting and Legal Aspects of Business ACC 543 Capital Budget Recommendation for Guillermo Furniture After careful evaluation of preexisting financial documents, an assessment has been made to determine what business decision will provide the greatest return for Mr. Navallez, owner of Guillermo Furniture. Presently, Mr. Navallez needs to re-strategize his business endeavors, because there is now new competition in the furniture manufacturing industry. The competition uses high-tech, automated machinery to mass-produce furniture at an end-price cheaper than Mr. Navallez can offer his clientele (Guillermo Furniture Scenario). Additionally, the competition has very little labor costs, as most work is done by machine; conversely, Navallez is projected to pay $44,065 in wages for the year of 2011 (Guillermo Furniture Financial Data Sheets). Although expensive, an option available to Mr. Navallez is to invest in high-end equipment and remain in the furniture manufacturing industry. In order to explore the possibility a potentially lucrative investment opportunity capital budget must be estimated and compared to the expected cash inflow. Capital budgeting techniques can be used to determine if the investment in high-tech machinery will provide a sufficient return on investment. Two methods commonly used are net present value (NPV) and internal rate of return (IRR). Additionally, the amount of time it will...
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...Capital Budget Recommendation Guillermo Navallez currently runs a premium quality furniture manufacturing business. Up until the 1990’s Guillermo was able to charge a premium for his furniture based off the quality that it reflected, until foreign competitors entered the market. Guillermo is currently reviewing his business plan to determine how he could change his business to compete in this more difficult business climate. Guillermo is deciding between updating his production processes with hi-tech new equipment or outsourcing the manufacturing to a company based in Norway and becoming a broker. Before proceeding, Guillermo will have to differentiate between the various capital budget evaluation techniques. Capital budgeting is a budgeting technique that is used to make various intermediate range decisions. In the Guillermo Furniture example, capital budgeting will help Guillermo to determine whether to purchase or lease the new hi-tech manufacturing equipment or whether Guillermo should increase his sales through changing his business model into a brokerage. There are several capital budgeting techniques that Guillermo can use to determine how best to proceed with his decisions. These concepts include the net present value, internal rate of return, the simple and discounted payback method, the unadjusted rate of return and the annual rate of return method (it is important to note that there are various other capital budgeting techniques). It is important to remember...
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...Guillermo Furniture Store Analysis Corporate Finance Dylan Lukens April 30, 2012 Guillermo Furniture Store Analysis The furniture store owned by Guillermo in Sonora, Mexico has operated a successful business creating custom furniture. As time went on Guillermo began to realize that other companies in the area had become interested in making furniture. The competition has forced Guillermo to consider alternatives within the Furniture Store. There are three alternatives to consider, which include going the high-tech route, being a broker, or continuing with his current model. Considering these alternatives means that a thorough analysis must be done to ensure the correct decision is made. The following will include and discuss a sensitivity analysis that will determine the optimal weighted average cost of capital (WACC) as well as calculating the net present value (NPV) of future cash flows for each alternative. As a manager of the furniture store the use of a capital budgeting techniques will be crucial. This includes a simple payback period, a discounted payback period and the net present value or NPV. The simple payback period method is the expected number of years required to recover from Guillermo’s original investment. When analyzing the incoming and outgoing cash flow it is clear that this occurred during year three of Guillermo Furniture. “Capital budgeting is fundamental because a firm is essentially defined by its assets and the products and services...
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...Guillermo Furniture Scenario ACC/543 June 4, 2012 Professor Introduction The Guillermo Furniture Store has been run by Guillermo Navallez for years. From his home town of Sonora, Mexico he has made handcrafted premium products. Recently, a dent has been put into his business. There have been new competitors to his market with high-tech approaches allowing them to price furniture at rock bottom prices. Second, with all the advances to the surrounding area and an influx of people to the area, the labor prices have jumped substantially. These changes have caused Guillermo to take a look at his business and realize that changes need to be made. He has decided to choose from 3 different options. He could shift to the high-tech solution, become a representative for another manufacturer, or continue in the market he currently is in. Over the next couple of pages I will look into the different capital budget techniques available, explain how the techniques would help, and make a recommendation on a route Guillermo Furniture should go in to continue to thrive in the ever changing surroundings. Capital Budget Techniques “Managers can choose from among numerous analytical techniques to help them make capital investment decisions. Each technique has advantages and disadvantages” (Edmonds, 2007). The three techniques that we will focus on are the payback method, net present value (NPV), and the internal rate of return (IRR). First...
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...Capital Budget Recommendation ACC: 543 April 4, 2011 Fred Johnston Capital Budget Recommendation Capital budgeting techniques are used to determine long term goals, new investment opportunities, and estimating and forecasting future and current cash flows. With any capital budgeting technique measuring risk, uncertainty, and the cost of capital as well as anticipated project performances determines whether to accept the project or reject it. Capital budgeting allows Guillermo Furniture an opportunity to increase their offerings, decrease their cost and possibility find new funding sources to achieve its goals of the company. The payback period is the length of time that is required for Guillermo Furniture to cover the initial investment for the proposed project. The payback period determines how many periods it will take for Guillermo to return the initial investment. In using the payback period when having multiple projects to chose from the one with the shortest payback would be considered a good choice. Calculation of the payback period is summing the project's positive cash flows per period, typically annually, until the sum equals the project's initial investment (www.associatedcontent.com, 2009). The number of time periods passed before inflows are equivalent to original investment price represents the payback period (www.associatedcontent.com, 2009). Net present value method picks up where the payback period lacks because net present value provides a gauge for...
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...Capital Budget Recommendation By Sara Hinton ACC543 Professor Gayle Mackay July 17, 2012 Located in Sonora Mexico is a furniture company owned by one Guillermo Navallez called Guillermo Furniture Company. The Guillermo Furniture Company has had quite the success since opening, however in the late nineteen nineties this success began to waiver. The reason for such a change in success for the Guillermo Furniture Company is due to globalization. Due to the automation embraced by the company’s competitors, which has caused a reduction in profit margins as well as raise production costs for the Guillermo Furniture Company, there has been significant decline in business. Mr. Navallez is now faced with a plethora of decisions that may or may not dramatically change the way in which the Guillermo Furniture Company is operated. The accountant that has been hired by the Guillermo Furniture Company has been assigned to analyze capital budget techniques that will help determine which course of action should be taken by Mr. Navallez. This has been accomplished by not only examining capital budget techniques but through extensive research in understanding business alternatives available to the Guillermo Furniture Company as well. There are different business alternatives available to Mr. Guillermo Navallez. Like many of his competitors, Mr. Navallez has the option of merging his business with that of a larger company or he...
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...Guillermo Case Study: Capital Budget Evaluation Techniques ACC/543 Guillermo Navalles faces many financial challenges in order to succeed in the present business environment. In order to ensure the continued profitability and competitive edge of Guillermo Furniture, he needs to make an investment decision on where to direct capital. He is deliberating between directing capital to purchase advanced equipment, or to adapt a brokerage business model. In order to assess the financial viability of both investment options, he is considering the application of capital budgeting techniques to help him in decision-making. Capital budget evaluation techniques can use data from financial and operating reports to predict potential performance of corporate investment; these entail evaluation using a suitable technique and giving recommendations based on calculations of forecasted future returns of investment. Capital evaluation strategies can be differentiated into techniques considering the time value of money, and techniques ignoring the time value of money. Guillermo will apply both techniques and rely on certain assumptions with their accompanying degree of added risk. The evaluation analysis assumptions are that the investment capital is $5 million with a desired return of 8 percent to cover inflation and decreased sales, as well as a 10-year investment term due to equipment life. The datasheet corrections are as follows: • The brokerage option requires no maintenance...
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...Capital Budget Recommendation Managerial Accounting and Legal Aspects of Business Introduction As requested by Mr. Guillermo Navallez, owner of the Guillermo Furniture Company, an analysis of existing investment opportunities will be presented through various capital budgeting evaluation techniques. Furthermore, a brief synopsis of how each method assists in determining the investment opportunity with the greatest return will be reviewed. A recommended course of action will be provided coupled with present value calculations to support this proposal. Capital Budget Evaluation Techniques Various analytical methods exist to help business owners make wise capital investment decisions. Because there are many evaluation methods, it makes good business sense to apply the various techniques to the same proposal in order to obtain multiple perspectives (Edmonds, 2007). The Net Present Value (NPV) method which takes the time value of money into consideration, is the capital budget technique which focuses on increasing the value of the business. Using Guillermo’s project data, the marginal cash inflows are defined as the increase in net cash inflows compared to the current situation. Since we know the depreciation formula under the high tech option has a projected useful life of ten years, this is the period used for this analysis. Calculations are as follows: Current Situation High-Tech Option Annual Net Income (Pretax) $46,118 Annual Net Income...
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...Guillermo Furniture Tabbatha Maynard ACC/543 June 4, 2012 Curtis Brooks Guillermo Furniture Guillermo Furniture, owned and operated by Guillermo Navallez, is at a point of needed to make a decision to help the company stay operational and profitable. There are many options that Mr. Navallez is considering and they need to be sorted through and examined. These options include acquiring a new hi-tech machine, becoming a distributor for a Norway company, selling his coatings (flame retardant and final coating) or no longer making these coatings and buying a similar product to use on his furniture. Capital Budget Evaluation Techniques To determine which option to choose, the techniques used to make this decision needs to be understood first. There are many capital budget evaluation techniques. The main ones that will be evaluated include net present value, internal rate of return, payback method and unadjusted rate of return. The first two are the most accurate and popular methods, but the other two methods are used as well. These methods can be used by themselves but are more accurate and effective if used in combination for the management team to have more information to base a decision on. The Net Present Value (NPV) is the present value of future cash inflows minus the cost of the investment. This method combines two concepts of value. “First, it determines how much cash will flow in as a result of the investment, and compares that against the cash that will...
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...Guillermo’s Furniture Store Scenario University of Phoenix Team C FIN/571 July 25, 2012 Dr. Guillermo’s Furniture Store Introduction Sonora Mexico is known to many people as a beautiful vacationing area in the heart of Mexico. Home to the largest furniture manufacturing companies, Sonora is also home to Guillermo Navallez, and has been for many years. Guillermo Navallez and his furniture company, produces a variety of tables and chairs, he even has a patented solution for his furniture. In addition, Guillermo handcrafts products are priced at a premium rate, which separates him from his competitors. Guillermo’s competition is increasing due to the inexpensive labor cost and location. After researching his competition, Guillermo has to determine the alternatives; he has available for his company. Based on the scenario, choices will include the high tech approach, or broker distributor. Team C chose the best approach to fit his need, and to represent what he has delivered for many years. Guillermo’s goal is to retire one day, and his best route to a safe, and fulfilling retirement is the hi-tech approach. High-tech Approach Guillermo’s largest competition has sparked uproar, in the communities of Sonora. Along with large retailer’s influence expanding, affordable housing, new establishments, and rock bottom pricing, he has to consider taking a different approach to stay aligned with his competition. Since the 90’s, two...
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...Capital Budget Recommendation Judy Milstead ACC 453/Managerial Accounting & Legal Aspects of Business November 26, 2012 Kyra Squirrel Guillermo Furniture Company is in the furniture business of manufacturing premium quality furniture. The total assets for Guillero Furniture Company from Dec 2010 ($1,350,529) to Dec 2011 ($1,356,411) will help in making the decision in exploring capital budget techniques. Until the 1990’s Guillermo was able stay afloat with just charging a premium rate for his quality furniture until competitors came on the scene. After reviewing his business plan to determine what could be change in the business to be able to compete with his competitors. In making this decision to update his production processes with new equipment or outsourcing the manufacturing to a Norway company or become a broker for this company. To evaluate the options available, many companies utilize various capital budgeting techniques in making the decision before investing in a new project. To base capital projects are evaluated on quantitative as well as qualitative analysis and information. To receive more information, it is best to used more than one technique to applied to a project. In exploring capital budget evaluations techniques to used various intermediate range decisions. In using this techniques will aid in the decision of resulting in the greatest...
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...Guillermo Recommendation In every business’ life there are times where the market adjusts and the business must change to meet that adjustment. As technology advances, populations change, and the economy continually shifts, every business owner must know how to use accounting principles to analyze alternative options and work toward a better future of the company given market demands. Such a shift happened for Guillermo and analysis became necessary to decide on the best course of action. Using financial calculations and principles the best alternative can be decided upon and proven to lead to a positive future for the company. Issues and Alternatives Sonora, Mexico’s high supply of timber assisted Guillermo and other furniture manufacturers to produce high-quality furniture at high prices and run a good business doing so (University of Phoenix, 2010). Two-years ago, two events happened that changed the business market for Guillermo. First, a competitor moved in with high-tech equipment that could mimic Guillermo’s high quality work at a lower cost. Additionally, the popularity of Sonora rose as did their population; this caused labor costs to sky rocket (University of Phoenix, 2010). With a large competitor and huge labor costs, Guillermo has to find a way to survive in this new environment. To remain in business in this new market Guillermo has to decide on new course of action; he has found three options. First, using the behavioral principle, he looked to his competitors...
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...Learning Team A Capital Budget Recommendation Gerald Shaw, Kenneth Barre, Rosa Daws ACC/543 Linda Miller February 23, 2015 Learning Team Weekly Reflection Week 2 For this week’s assignment Learning Team A will be providing insight on the three capital budgeting techniques in relation to the Guillermo Furniture Scenario. Learning Team A after careful evaluation of the data sheets provided for Guillermo Furniture will identify the best uses for the three techniques and lastly provide a capital budget recommendation that best suites Guillermo Furniture. Three Capital Budget Evaluation Techniques-Gerald For Guillermo Furniture, Learning Team A will advise on three different capital budget techniques available to aid in the decision-making process. Those three methods are NPV (Net Present Value), IRR (Internal Rate of Return), and Payback method. NPV (Net Present Value) NPV or net present value helps an organization figure out whether it’s better to invest in a project based on the net amount of discounted cash flows for the project (Eldenburg, PhD & Wolcott PhD, CPA, CMA, 2011). NPV is best served positive which will indicate that the project will be a benefit by increasing the value of the organization. NPV is calculated through expected cash flows that include an initial investment, incremental operating cash flows, and terminal cash flows (Eldenburg, PhD & Wolcott PhD, CPA, CMA, 2011). That...
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