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Guillermo Furniture Capital Budget Recommendation

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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 somewhere else. Another technique is to calculate the internal rate of return of each investment opportunity. The investment that uses the most cash to turn the larger profit is considered to be the best option. Even if one investment has a higher rate of return, if it does not use a large enough investment figure, it may not be the best option (Edmonds, et al., 2007). Another...

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