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Capital Budget Recommendation

In: Business and Management

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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 of money measurements are net present value and internal rate of return methods. The net present value method measures the present value of cash inflows less the present value of cash outflows to produce the net present value of the investment, or in other terms the value of the investment if all cash flows were occur in the present versus in the future. The internal rate of return method

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