...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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...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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...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 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 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 Store Analysis FIN/571 July 9, 2012 Guillermo Furniture Store Analysis The furniture industry can be a profitable one many times, but it can also be costly when an opportunity arises and is not managed appropriately. Guillermo Furniture Store, in Sonora Mexico, is a manufacturer of furniture. The capital budget selections all correlate with choices the organization has to make. Guillermo has several selection opportunities; he is restricted by past and present choices. Guillermo’s Furniture Store is the largest in the area and has been the main staple for many years, but new competitors have claimed a part of the business creating a challenge for him to act. Guillermo’s operating environment has changed and is now mandated to decide on one of three investment opportunities. The ultimate value of what capital budget opportunities are available to Guillermo will be evaluated by the net present value they have to offer. Only a positive net present value will add value whether the proprietor is an individual or a shareholder. The rise in competition is causing a decreasing profit margin. The paper will provide the evaluation of the financial concepts in the conclusion of the appropriate alternative necessary to improve the business, evaluate changes the owner is creating, and show how the capital budget analysis will afford Guillermo with the necessary data to acquire the best return on his asset. As the largest furniture industrial manufacturer, Guillermo...
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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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...Guillermo Furniture Store Case Study The aim of this paper is to examine the Guillermo Furniture case study. It begins with a description of the store, the current market challenges it faces, and the options that its owner, Guillermo Navallez, has in meeting those challenges. It then explores these options in the context of the business’ budget, performance reports and accounting information, as well as from an ethical perspective. Located in Sonora, Mexico, Guillermo Furniture has historically done well as a furniture retailer. Its success, however, has been challenged by the introduction of a major competitor, an international chain that has recently opened a store in the community. The result has been a rise in costs, a drop in prices and a smaller market share for the smaller company. Navallez, Guillermo’s owner, has explored a number of options for dealing with these challenges. Unwilling to merge with another company, he is left with three remaining options: investing in expensive new technology – in the form of a laser lathe – in order to reduce production costs, choosing to represent a Norwegian furniture manufacturer or focusing his efforts on marketing his patented furniture coating process. Budget, Performance and Accounting In order to make an informed decision, Navallez should begin by evaluating his budget. A budget is a quantitative action plan based on a company’s performance. A performance report provides information about variances in a company’s performance...
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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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...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 University of Phoenix John ACC 543 Bruce MCMenemy This paper will discuss various capital budget evaluation techniques. This paper will differentiate between these techniques to determine the best course of action for Guillermo. This paper will provide a course of action based on capital budget evaluation techniques. This paper will provide present value calculations to support the recommended course of action for Guillermo Furniture. Evaluation Techniques There are many evaluation techniques that can be utilized when evaluating capital budget opportunities. This paper will discuss the most relevant techniques to utilize at Guillermo Furniture. The techniques implemented should utilize Time Value of Money (TVM) for larger investments and for small investments one can utilize a quick method for analysis of opportunity for investment purposes. The TVM is an explanation of the current value of a future dollar. “This concept recognizes that the present value of a dollar received in the future is less than a dollar. For example, you may be willing to pay only $0.90 today for a promise to receive $1.00 one year from today”. (Edmonds, Edmonds, Olds, McNair, Tsay, Schneider, 2007) This technique analysis the amount of money received in future payments and calculates the value of that money as if it were in hand today. Payback Method The Payback method does not take TVM into consideration; however, it can be utilized to evaluate fast turnaround...
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...individual paper was centered on Guillermo Furniture Store location, the production of work and the company finance. Week three individual paper will state three alternative measures for Guillermo Furniture Store working capital policy by weighting the average cost of capital, and by implementing multiple valuation techniques toward reducing the business risk. Business within Guillermo Furniture Store started to decline in the early part of 1900s. The effect of outside influences has opened up a new era of business for foreign competitors. The competitors have allowed their customers to crave the new technology of produced furniture by creating a lower price range. The simulation stated that housing were inexpensive, the location of business had mild weather, and beautiful scenery, along with uncongested roads a new International Airport and plenty of new development (University Of Phoenix, 2011). Alternatives To make a profitable decision the implementation of alternative needs to be considered. The three alternatives investment projects (the currently used approach, the high-tech approach, and the broker approach) needs to be categorized in a distinct order. The currently used approach consists of the company not changing their position, they will continue with their business lifestyle since the 1900s. High-tech alternative will allow the company to produce more custom furniture at a lower cost. The broker alternative will have allowed Guillermo to become one another store...
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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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...Guillermo Analysis Paper FIN 571 June 11, 2012 Mr. John Kushner Guillermo Furniture Store Analysis Guillermo has a manufacturing company is Mexico. Guillermo has an excellent location for his business because of the supply of timber for his furniture. Inexpensive labor and slight raise in the price of the furniture had Guillermo making a good profit. The business was going well for Guillermo until a new competitor entered the furniture market. The rise in population and jobs increased the cost of labor causing Guillermo’s business to suffer. The success is challenged by the international chain that recently has opened a store in the community. The result has caused a rise in cost, a drop in prices and producing a smaller market share for the smaller company. Guillermo’s owner has explored a number of options for dealing with this challenge. He is unwilling to merge with another company, so he is left with several options one investing in new technology, which is expensive, laser lathe to reduce his production cost, and to focus on marketing his patented furniture coating process. The principle of valuable ideas is to have a new product or services are unique from competitors and will add value to business. Guillermo has a unique patented method for constructing a coating for the furniture. Guillermo should consider making changes to his business, such as coordinating his distributor chain to become a demostrator for this other...
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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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