...Capital Budget Recommendation Capital Budget Recommendation Introduction Guillermo faces a big decision ahead. Not wanting to be acquired by a larger competitor or expand his management responsibilities by acquiring another organization, he had decided to move his company from being primarily a manufacturing company to primarily a distributing company. A competitor in Norway needs channels to distribute in North America and using his existing distributor network Guillermo could become a representative for the manufacturer while retaining some of his high end custom work. In addition, Guillermo has a patented process that creates a flame-retardant for his furniture coating but he will need to buy a separate product for a finish coating. Capital Budget Evaluation Techniques Guillermo has many evaluation techniques to choose from to make his capital investment decision. He can also combine more than one technique. The following is a description of the techniques he might use. Finding the Net Present Value (NPV) is one evaluation technique. Net Present Value is a comparison of the present value of the future cash inflows to the cost of projectors by subtracting the cost of the investment from the present value of the future cash inflows (Edmonds, et. al., 2007). “A positive net present value indicates the investment will yield a rate of return higher than 12 percent. A negative net present value means the return is less than 12 percent” (Edmonds, et. al., 2007)...
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...Capital budget recommendation ACC543 September 9, 2013 Capital budget recommendation As an industry leader of furniture production in Sonora Mexico, Guillermo Furniture has enjoyed many years of success. This success can be attributed to many factors such as the inexpensive labor found in the region, the ability to price furniture at a premium due to the lack of competition, and the abundant supply of materials found in the area that were needed to produce products. However, new competition as well has a growth in the economy causing increased labor cost has caused the profit margins of Guillermo Furniture to shrink substantially. The need for a new business structure and model has emerged in order for Guillermo Furniture to continue enjoying success and again obtain comfortable profit margins. Capital investment decisions can be critical to the success or failure of a business. Understanding the process of capital budget evaluation techniques is therefore an important step to decision making. Two basic categories of techniques exist, techniques that consider the time value of money and techniques that ignore the time value of money the later producing less accurate results but being easier to understand and compute. The time value of money concept takes into account that the current value of a dollar that is received in the future is less valuable than it is if received today (Edmonds, Olds, McNair, Tsay, Schneider, & Milam, 2007). The two most common time value...
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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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...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 of the most important financial tools used among organizations across the board, and the intent is to long-term investments decisions. There are capitals budgeting analysis methods to determine...
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...Guillermo Furniture Capital Budget Recommendation Kendall Nicholson University of Phoenix Managerial Accounting and Legal Aspects of Business ACC/543 Curtis Brooks April 23, 2012 Guillermo Furniture Capital Budget Recommendation Guillermo Furniture is on the verge of making an important business decision. Increased competition and rising costs have shrunk its profits considerably. Although many of its smaller competitors are merging with larger corporation, Guillermo does not consider this a viable option. Guillermo Furniture must choose between upgrading to a high-tech computer controlled laser lathe that reduces labor costs dramatically and using its distribution channels to help a competitor to market its products. This option would result in Guillermo becoming more of a distribution network than a manufacturing company. Guillermo also has a patented process for coating its furniture. The flame retardant portion of this process is potentially profitable, but the finished coating is not as desired. Capital Budget Evaluation Techniques Several techniques are available to Guillermo to use for making a decision on which course of action is best. One technique is the net present value (NPV) technique. This technique compares the present values of future cash inflows against the initial cost and cash outflows of a capital investment. In this case, the future inflows of cash must be compared with the interest rate that Guillermo could receive on the investment...
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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 Evaluation and Recommendation Guillermo Furniture Company handcrafts midgrade and high-end sofas. Changes occurring in the business environment and economy prompt the company to find different options of investing to stay in business. The newly hired accountant of the company is asked to differentiate the various capital budget evaluations techniques, and explain how these different techniques will assist in making the appropriate recommendation. The capital budget techniques used and explained for Guillermo Furniture Company are the Payback Period, Accounting Rate of Return (ARR), and Net Present Value (NPV). Capital investment is a processes organizations use to evaluate major investment opportunities. A capital investment decision is a decision to exchange current cash outflows for expectations of the company receiving future cash inflows. One must understand the time value of money concept assist a company in developing a rational response or decision to invest. The time value of money concept recognizes the present value of a dollar received in the future is less than a dollar. When a company invests in capital assets, it sacrifices present dollars in exchange for the opportunity to receive future dollars (Edmonds, 2007, p.1150). Time Value of Money Time value of money is necessary when comparing possible business investments that have different costs, cash flows, and service lives. Processing a discounted cash flow technique, such as the net present...
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...faster and at lower costs. With the emergence of this sophisticated technology, the company requires change to cease the decease of revenue and sales (University of Phoenix, 2012). Guillermo hires Jevaloch Consulting Firm, Incorporated to examine his current business forecast and choose strategies in optimal working capital. Additionally, Jevaloch will also provide an efficient pro forma budget and recommend an implementation plan. Guillermo Furniture Forecast Forecasting is an important tool for estimating the future market value for the business. Jevaloch consultants began the examination of Guillermo Furniture by reviewing a six month Figure 1.1 Budget Sales Forecasts. Figure 1.2 Actual Sales Forecasts. projection of sales forecast for units of chairs, the top sales item for the store, sold from January to June 2010. Figures 1.1 and 1.2 are representative of the budget unit sales and actual unit sales for Guillermo Furniture. The average monthly demands for the budget sales is 18,014/6 = 3002.3 and 17,997/6 = 2999.5 for actual sales. Although the monthly averages differ slightly, the actual sales are higher per month than the budget sales. Budget sales show a steady increase with a dip in the month of June and actual sales remain steady at about 3,000 units with a slight dip in March. Jevaloch concludes Guillermo possesses excellent managing skills for the company and proceeds forward with the optimal...
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...Capital Budget Recommendation University of Phoenix Managerial Accounting and Business Law ACC/543 Week 1 August 04, 2014 Introduction The objective of this brief is to create a layout of Guillermo Furniture Company and their need for existing financing opportunities to be exhibited through different capital planning assessment procedures. Additionally, a short summary of how every system aids in deciding the venture opportunity with the best return will be analyzed. There will be several recommendations made and these recommendations will be coupled with present value calculations to support this proposal. Capital Budget Evaluation Techniques Different analytical routines exist to help entrepreneurs settle on wise capital investment choices. The fact remains that there are many evaluation methods and because of this, “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 considers the time value of cash and is the capital budget strategy which concentrates on expanding the value of the business. Utilizing Guillermo's venture information, the marginal cash inflows are characterized as the expanding of net cash inflows in comparison to the current circumstance. Since we know the depreciation formula or equation under the innovative high tech choice has an anticipated valuable life of ten years. This is going to be the time period used for this...
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...IS THERE REALLY A BUDGET CUT? An Analysis of Government Financing for the University of the Philippines Recent calls made by progressive student organizations, including faculty and administrators of state universities and colleges (SUCs), most notable of which is the University of the Philippines (UP), have made the issue of a budget cut rise again. They assert that the present administration of President Benigno S. Aquino III has continued the tradition of his predecessor in slashing the budget allotted for the education sector, and basic social services in general. Is this true as is there really a budget cut? Or is there merely a blind analysis of the proposed budget? Policy Basis for Financing The rationale on how the government makes its budget for SUCs stems from a number of recommendations and laws. One of the most integrative recommendations of recent years was the report of the Congressional Commission on Education (EDCOM). The EDCOM provided for the overall assessment of POLICY GUIDELINE SALIENT FEATURES the education system Congressional Commission on Adopt a formula for determining shares and proposed of the tertiary education in the over-all administrative actions Education Report (1991) available and anticipated resources. on how to improve Republic Act No. 7722 or Higher education managed under education. Higher Education Act (1994) deregulated nature under Commission The EDCOM report on Higher Education. proposed that a SUCs can retain their incomes derived formula...
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...The University of the West Indies, St. Augustine Faculty of Social Sciences Department of Management Studies M.Sc. Aviation Management AVMT 6001 – Accounting for Business Decisions AVMT 6001 – Group Project 2 Managerial Accounting - JetBlue Airways Corporation Group Members: Cherrish Bridgemohan - 807001633 Rajiv Debie - 04708006 Israel Duncan - 814004144 Kenrick Duncan - 814002425 Neil Shepherd - 814004177 Signatures: Cherrish Bridgemohan ___________________________ Rajiv Debie Israel Duncan Kenrick Duncan Neil Shepherd ___________________________ ___________________________ ___________________________ ___________________________ November 16, 2014 Table of Contents I. II. Table of Abbreviations ........................................................................................................................ 5 Executive Summary............................................................................................................................ 6 III. Introduction......................................................................................................................................... 7 IV. Background – JetBlue Airways ......................................................................................................... 7 V. Management Accounting Information.............................................................................................. 8 Financial Accounting versus Management Accounting ...........................
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...RE-INVENTING XYZ Financial Analysis Report Finance Team Prepared for: XYZ BPE Project XYZ Ministry of Government Services November, 1994 XYZ BPE Project Financial Analysis Report Table of Contents Executive Summary ...................................................................................................................................................................................1 Financial Model Review ............................................................................................................................................................................3 Financial Baseline Review .........................................................................................................................................................................4 Base Case Financial Analysis ....................................................................................................................................................................4 Significant Costs and Benefits .................................................................................................................................................................5 Forecasted XYZ Operating Expenditures ..............................................................................................................................................14 Forecasted Operating Expenditures Comparison..........................................................................
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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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...Furniture Store Recommendation Guillermo Furniture Store (Guillermo) is a small business that deals in handmade custom furniture that is created by the sole proprietor Guillermo Navallez and his employees. Guillermo is located in Sonora, Mexico, an area that has become both a tourist attraction and a place for some people to call home. Guillermo is facing the liquidation of the store if the decision maker does not analyze all possible alternatives and accept the recommendation of a final decision (University of Phoenix, 2010). This paper will examine a few alternatives that have been suggested for the success of the enterprise. A recommendation of a final decision for Guillermo has been included, in addition to, the justification for the recommendation. A pro forma cash flow budget for the company has been included as a guide for the next five years beginning with year 2012 and ending with year 2016. Alternatives Applying the principles of finance to any situation can result in a more informed decision that is made from a suggested recommendation. Capital Market Efficiency, Time Value of Money, Signaling, Behavioral, and Risk Return Trade-off are financial principles that the decision maker can focus on before accepting a final recommendation about the firm’s capital structure (Emery, Finnerty, & Stowe, 2007). Final recommendation Pro forma cash flow budget 2012-2016 ...
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