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 require to recuperate the initial amount of money invested can be estimated using a method referred to as payback period, where the amount of the initial investment is divided by the annual net cash inflow (Edmonds, 2007). Assessing capital investment budgets using the NPV method involves subtracting the cost of the initial investment from the present value of future cash inflows (Edmonds,